I Faded the Oil Hype — Here’s How the Trade Played Out

The benefits of staying disciplined, focusing on risk and keeping a clear read on sentiment versus reality

• I sold the US Oil Fund LP (USO) July 18 $94 call for $3.70 on June 18 and bought it back yesterday for $2.36.
• The thesis was built on a fear-driven oil spike that wasn’t supported by supply/demand data.
• Inventory reports showed gasoline and distillates building, which signaled potential demand issues.
• The options market was pricing in extreme upside risk, which created premium-selling opportunities.

Last week, I wrote about a growing disconnect between crude oil’s price action and the underlying fundamentals. Both West Texas Intermediate (WTI) and Brent

Crude were ripping higher — WTI broke above $80 — as headlines flared over military conflict between Israel and Iran. The fear centered on the possibility of disruption in the Strait of Hormuz, through which roughly 30% of global oil supply moves.

That fear triggered a run on upside protection. Traders flooded into call options to hedge against a tail-risk spike in oil — but no actual disruption had occurred.

Tankers were still moving. Inventories weren’t collapsing. This wasn’t 2022 with Russia-Ukraine; it was more speculation than reality.

That set the stage for a short volatility opportunity.

I focused on the United States Oil Fund ($USO), a liquid exchnge-traded fund (ETF) that tracks front-month WTI contracts. Specifically, I looked at the July 18 $94 call, which was over 14% out of the money. It was trading for around $3.70, pricing in a potential move that hadn’t been seen since oil broke above $100 in Q1 2022.

My core thesis: We were witnessing a pricing of fear, not fact — and that mispricing created a strong risk-to-reward opportunity.

So I took the trade.

Entry, exit and execution

On June 18, I sold the USO July 18 $94 call for $3.70 in premium. It was a naked short — meaning I had no hedge — but my thesis. Oil was overbought, and the options market was clearly inflated.

By June 23, oil had started to cool, drifting back toward the mid-$70s. The geopolitical headlines were still appearing, but the actual fear premium in options had started to collapse.

I bought the call back for $2.36, locking in a $1.34 profit per contract, or roughly a 36% return on risk in five days.

That quick profit wasn’t about catching a huge move. t was about fading inflated premium and managing the position.

Why I closed the trade early

Some traders might’ve held longer, hoping to squeeze out every bit of theta. But here’s why I chose to exit:

• The move I was anticipating already happened (oil cooled, volatility dropped).
• The remaining premium wasn’t worth the risk of a headline reversing the trade.
• I’d rather recycle capital into the next setup than force extra returns from a trade that’s done what it needed to do.

The energy market is often driven by emotion, especially when geopolitical tension heat up. But emotion doesn’t always equal action. The Strait of Hormuz didn’t shut down. There was no global supply disruption. Yet traders priced in an event as though it had already happened.

Final thought

This trade worked out, but it wasn’t about calling a top or having a crystal ball. It was about sticking to a process, recognizing when the market was pricing in something that hadn’t actually happened and managing risk accordingly.

Not every trade plays out this cleanly, and I don’t expect them to. But over time, we give ourselves a better shot by staying disciplined, focusing on risk and keeping a clear read on sentiment versus reality.

On to the next setup.

Errol Coleman appears on the tastylive network shows Today’s Assignment and Trades on the Go.

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