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Options Trade Alert: Bullish Double Vertical on USO

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- At Top Gun Options, we're overall market neutral. Volatility (VXX)is plumbing new lows not seen since July 2011 and the invisible hand of the Fed seems to be lifting this market gently skyward.

Even Bernanke's "no QEIII for you" comments in front of Congress didn't spook the market liquidity drunks, and the party continues. It will end -- not a matter of if but when. We have identified a potential target based on our overall strategic mindset.

Target: United States Oil ETF (USO) currently trading at $40.48.

Commit Criteria: At the beginning of February, the Washington Post reported that Secretary of Defense Leon Panetta believed that Israel would strike Iran potentially as early as "April, May or June." Nearly two weeks later, the head of the Russian General Staff, General Nikolay Makarov, echoed Panetta's strategic mindset by saying, "Iran is a sore spot," and "I think a decision will be made by the summer."

I have several heavy friends ("heavy" is a navy term for high-ranking officers) deployed as commanding officers of fighter squadrons on the "tip of the spear" in the NAG (Northern Arabian Gulf) who confirm that tensions are much higher than reported. The intel-gathering we've done on this trade has been significant and even if Obama "bribes" Netanyahu to keep cool until after the elections, we still have the approaching summer travel months where oil tends to spike and oil CEOs are dragged in front of Congress by "leaders" who don't understand the words supply and demand.

6-Month and 20-Day Charts:

Our 6-month radar reflects the steady rise in oil as tensions in the Middle East rose and Europe considered sanctions.

But after the immediate threats cooled, USO has found support in the mid-30s, seen another spike based on some saber rattling and other supply issues, and is now on the 20-day chart is channeling in a pennant formation. We believe USO is posied to a breakout to the upside.

Tactic: Bullish Double Vertical Debit Spread

Tactical Employment:
  • Buy to Open 15 Jun 33 Puts
  • Sell to open 15 Jun 36 Puts
  • Buy to Open 15 Jun 43 Calls
  • Sell to Open 15 Jun 46 Calls
  • For a net debit of $.17 per contract
  • Maximum risk = $4,755 (just under 5% of Primary Model Portfolio risk rule of engagement)
  • Maximum reward = $4,245
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