Key insights
- The author suggests USOI is poised to outperform due to high implied volatility in crude oil, generating income from covered calls, and a backwardated futures curve providing roll yield. A future tailwind is the eventual need to refill strategic petroleum reserves, creating a floor for crude prices. This could positively influence energy equities.
USOI
essentially, they sell covered calls on front month crude oil futures
besides the fact that the strait of hormuz is still closed and hedge fund managers are still long crude, I want to point out two things that makes this fund set to outperform as well as a future tailwind that you might not have thought about.
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captures volatility in oil via covered calls. crude is currently at an IV of 85 at a 6% out of the money strike, they could be collecting mid single digits returns per month on the call.
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persistent backwardation tailwind. the current yield curve has mid single digits roll yield. This will positively affect the fund because they sell high and buy low when rolling forward contracts
Now for the tailwind- not many people have mentioned it but when all is said and done, hormuz open, oil infrastructure repaired, the governments that have deployed strategic oil reserves will have to refill that. Trump already forgot to refill the SPR from Biden's release during the hyperinflation of 2022. I find a floor on crude oil that should support this fund until oil goes back into contango and vol dies down