Volatility has finally returned to the oil patch. And that’s a good thing. Before yesterday’s bloodshed, the Street’s favorite oil ETF, USO, had become a total bore. Its direction, trendless. Its volatility, dead. And then Wednesday happened. The volatility beast returned to ravage the land sending USO down 5.6% amid oh-my-gosh volume.

From a price perspective, USO breached a significant horizontal support level along with its 200-day moving average. While it remains in a longer-term sideways range, don’t be surprised to see a bit of downside follow-through in the days ahead. The $10 and $9.50 zones will be the go-to targets if sellers want to press their advantage here.

What interests me more, and what is the topic of today’s missive, is the action in implied volatility. Take a gander at the IV Rank displayed in the lower panel of the chart. Before yesterday implied vol for USO options was deader than a doornail. And that means option premiums were small. Strategies like covered calls and naked puts lacked any profit-giving oomph.

Ever since I took profits on my naked puts at the beginning of January, I’ve been watching oil from afar. Sure, I wanted to participate. Frolicking in the oil patch is one of my favorite past times. But the options market was being stingy. I scoured the landscape in search of an option worth selling – calls, puts, anything. But, in the end, my search was found wanting. The countryside was barren, its opportunity stolen by implied volatility.

During my wanderings, I stumbled upon pockets of premium sellers. Like druids of another age, they sat encircled round a shrine offering prayers to the gods. Amid their humble supplications were pleas for volatility’s return.

And, guess what?

Yesterday they received their answer. Like a thief in the night, volatility finally returned. And with a vengeance, I might add. USO’s IV rank ramped to 25% by day’s end. And while I’d like to see its flight continue to the 40% or 50% region, today’s vantage point is far superior to anything else we’ve seen this year.

To be clear, the volatility ramp means option premiums have swelled. What was once a starved calf is now a fattened cow, ripe for the slaughter house. Before Wednesday’s surprise a put option sitting 6% out-of-the-money, like the current April 10 strike, would have been worth around 13 or 14 cents. Now, it’s worth 19 to 20 cents. That’s about a 40% increase in the cost. Or, said another way, premium sellers are getting 40% more for selling the same option.

As to whether or not now is the best time to sell USO puts depends on your bias. If you think the oil selloff persists, you might as well wait. Better prices will come to put sellers if USO continues falling. Of course, you could always hedge your bets by scaling in. Sell some now and some later, presumably at a better price. I highlighted this crafty technique in last week’s options report.

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