Trading Nation

It’s time to bet against crude oil, and here’s how to do it: Technical trader

Share
VIDEO3:2303:23
Trader explains why crude's run is almost done

Crude's five-day win streak came to an end on Wednesday, and one trader believes the drop is a sign that oil's comeback is done.

Looking at the oil-tracking ETF USO, Todd Gordon of TradingAnalysis.com says the chart is "moving into technical resistance," implying that further upside for crude may be hard to come by.

"If we were to connect the most recent highs, you can see that crude oil has got some overhead resistance or ceiling to contend with right at about the $10.75 mark here in the USO," Gordon said Wednesday on CNBC's "Trading Nation," as the ETF traded at about $10.60.

And even if USO had more room to run, it would only reach the $11 mark, according to Gordon. The trader got to the $11 level by using a Fibonacci retracement technique to identify "the end of correction" for oil, determining that the commodity would only hit the 75 percent retracement mark from its May 8 low before falling.

To play for a short-term drop in USO, Gordon is buying the June 9 weekly 11-strike put and selling the June 9 weekly 10-strike put for 43 cents, or $43 per options spread. If USO were to keep climbing and close above $11 on June 9 expiration, the $43 Gordon paid to make the trade would be the amount he would lose.

If USO were to close below $10.57 on June 9, however, Gordon would make money on the trade— all the way up to a maximum reward of $57, which the trade will return should USO close at or below $10 on expiration.

WTI crude oil is up 4 percent from last week, remaining above $51 even after Wednesday's drop.