Bearish investors snap up puts in oil ETF

By Doris Frankel

CHICAGO, March 11 (Reuters) - Option investors on Tuesday appeared to be betting on a decline in the price of oil in an exchange traded fund linked to the commodity even as U.S. crude oil prices surged to another record.

On the New York Mercantile Exchange, April crude CLJ8 settled at a record $108.75 a barrel, up 0.79 percent, trading from $106.61 to a new intraday high of $109.72, exceeding Monday's $108.21 peak.

NYMEX crude has settled at a record above $100 eight times since Feb. 19 and option traders may be positioning protectively for a slowdown in this momentum reflected by the spike in put volume in the United States Oil Fund USO.A, a fund designed to track the price of crude oil.

According to option analytics firm Trade Alert, a total of 52,000 puts compared with 9,138 calls changed hands in the ETF, three times the normal volume.

"There is weekly inventory data due out tomorrow, which could affect oil prices," said independent options trader Frederic Ruffy. "Some players might be looking to protect profits by purchasing puts on the USO ahead of the news."

Ahead of the U.S. Energy Information Administration's weekly U.S. inventory data due on Wednesday, an expanded Reuters poll of analysts forecast a crude inventory build of 1.7 million barrels.

"Also, there is talk that, since stocks have been under pressure, gold and oil have become asset bubbles," Ruffy said. "If optimism returns to the equity market, it could lead to money flows out of some key commodities markets and trigger a decline in the price of oil."

Unlike most other ETFs and mutual funds, the USO is a commodity pool that invests in oil futures on the New York Mercantile Exchange, options on oil futures, and forward contracts. It does not hold shares of individual companies.

"The idea underlying the fund was to give investors a way to get exposure to crude oil prices through an exchange-traded fund," Ruffy said.

"Investors expecting oil to move higher in price can buy shares of the ETF. On the other hand, if traders expect oil prices to fall, they might sell shares short," he said.

The fund on Tuesday closed at $86.34, up 71 cents after posting a 52-week high of $86.34.

In the options market, much of the focus was on April USO puts, allowing investors to sell the underlying fund's shares at a given price and time by mid-April.

Of note were the April puts with strike prices of $83, $84 and $87, as well as front month March $85 and $86 strikes,

"Traders are aggressively buying puts exceeding the open interest in several contract strikes," said Chris Mckhann, analyst at Web information site optionmonster.com in Chicago. "They are clearly positioning for a pull back in crude oil prices over the next 38 days or sooner." (Reporting by Doris Frankel; Editing by Leslie Adler)