How We Banked a Tidy 25.5% Gain in a Week

The action in Venezuela over the weekend caught plenty by surprise. Folks are now frantically trying to work out how things will develop from here…

Not just in terms of who will take control of day-to-day government functions. But more specifically, what will ultimately come of Venezuela’s vast oil reserves – widely regarded as one of the world’s largest?

From a trader’s perspective, there’s also the question of how events will impact the oil price. And how changes in that oil price will flow into the economy.

Having traded oil literally for decades, I’ve seen how wars, coups, and both economic and geopolitical turmoil can play havoc with oil. But the truth is that oil can also provide plenty of opportunity irrespective of the news cycle.

In the space of a week, we generated a 25.5% gain. And that came despite my being early into the trade.

So, let’s see how the trade panned out…

Overstretched Down Move

The chart below is the United States Oil Fund (USO) – an ETF that tracks the WTI crude oil price.

As the 50-day Moving Average (MA, blue line) shows, USO had been in a slow but steady downtrend since August. That move was punctuated by USO making a series of both lower highs and lower lows – a classic downtrend.

Check out the chart…

United States Oil Fund (USO)

Source: eSignal

However, as you can see, despite that prevailing downtrend, there had been plenty of counter-rallies along the way. Such as in October (red circle) when USO rapidly rebounded in conjunction with an upswing in buying momentum…

That’s shown by a momentum indicator – the Relative Strength Index (RSI) – rallying sharply from oversold territory (lower gray dashed line). It’s a move I captured for members of my One Ticker Trader (OTT) trading service, which produced a very handy 87.2% return in just six days.

And with oil again approaching oversold territory last month, I was on the lookout for a similar mean reversion trade. That’s where I look for something that has become overstretched to either the downside or upside, and then I aim to profit when it snaps back the other way.

At the time we entered the trade, the WTI oil price was also approaching a key support level around $56 – the same level that USO bounced off in our October trade.

So we were looking to capture both a bounce off support and a rebound in buying momentum…

To do that, we bought a USO call option. A call option typically increases in value when the underlying asset rallies.

If you look at our trade entry point, you can see I was a day early. USO made another step lower before the RSI formed a “V” and rallied (green circle) from oversold territory, causing USO to jump.

That resurgent momentum put our trade back on track. USO then gapped higher after the U.S. Coast Guard tried to intercept an oil tanker off the Venezuelan coast.

And with our position in good profit and the holiday period fast approaching, we decided to take our profits and bank them. Putting a “P (for Profit) on the Page” has been one of the cornerstones of my career.

Outsized Gains in Short Periods

To be clear, we generated this gain using options. Options magnify both gains and losses compared to just trading shares.

And because options are finite, the clock is always ticking. Meaning that time decay is constantly eroding the value of your option.

However, as you can see, despite being early with our entry, we were able to exit our position before time decay eroded too much of the option’s value. I’m always happy to bank double-digit gains for my subscribers in a short time.

As the situation in Venezuela shows, we’re living in times of increasing uncertainty. You just never know where and when another skirmish could break out.

But as this trade also highlights, we can still pick up outsized gains in a short time by looking for clear overbought and oversold signals.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict