This smart way to handle an options trade in oil eliminates time decay and limits downside risk

Long-term investment opportunities are arising in the crude oil market, but traders should remain strategic. Caution seems advisable because of the uncertainty caused by geopolitical tension, shifts in economic policy, and fluctuations in supply and demand. Plus, tariffs are pushing the country toward weaker economic growth and higher inflation, Federal Reserve Chair Jerome Powell warned yesterday.

But about those opportunities: One way I’ll be looking to capitalize on a potential oil price rebound is through $USO (United States Oil Fund) using the ZEBRA (zero extrinsic back ratio) strategy. This method was pioneered by Liz Dierking and Jenny Andrews, hosts of the tastylive program called the The LIZ & JNY Show. It provides synthetic stock exposure without the concern of time decay—a significant advantage over traditional long options strategies.

First, let’s review several factors influencing oil prices this week:

1. Russia agrees to halt energy infrastructure attacks

• Russia has agreed to a U.S. proposal to stop attacking Ukraine’s energy infrastructure, a move analysts say could pave the way for more Russian oil entering global markets.
• More supply entering the market could weigh on crude prices, limiting short-term upside.
• Oil prices reacted bearishly, with Brent crude futures down 0.2% to $70.56 and WTI crude falling 0.3% to $66.65.
• While this decision reduces immediate risk to supply, the geopolitical situation remains volatile and subject to sudden shifts. (Source: Yahoo Finance.)

2. U.S. tariffs are raising the fear of recession, which affects demand for oil

• The U.S. has imposed import duties of goods from Canada, Mexico and China, fueling concern about a possible global economic slowdown.
• A recession or even slower economic growth would reduce global energy demand, creating a headwind for oil prices.
• Those fears aside, Middle East tension could remain a wildcard capable of disrupting supply and lead to a spike in oil prices.

3. Federal Reserve policy and interest rate decisions

• When the Federal Open Market Committee met yesterday it kept interest rates steady—as expected.
• However, dovish hints about future rate cuts could boost economic sentiment and drive higher energy demand, which may push oil prices higher. Taking a slightly dovish step, the Fed slowed the pace of its balance sheet reduction, but only for Treasuries.
• Higher interest rates tend to slow economic growth, which negatively affects crude demand, while rate cuts typically stimulate economic activity and increase consumption.

4. U.S. crude stockpile report shows mixed data

• The latest American Petroleum Institute (API) crude inventory report showed:
  • Crude oil stockpiles rose by 4.59 million barrels, signaling a potential oversupply.
  • Gasoline inventories fell by 1.71 million barrels, indicating steady demand for refined products.
  • Distillate stocks declined by 2.15 million barrels, showing supply tightening in some areas.
• The contradictory data suggests that while crude supply is increasing, demand for refined products remains relatively strong.

With oil prices hovering around recent lows, I see potential for a short-term rebound, but I’ll be selective in my approach. Instead of buying shares of $USO, I’ll use a ZEBRA options strategy to gain long exposure while limiting downside risk.

Trading strategy: Using ZEBRA on $USO for long delta

The ZEBRA strategy (Zero Extrinsic Back Ratio) provides synthetic stock exposure with a defined risk profile. Unlike a traditional long call or debit spread, the ZEBRA eliminates time decay, making it an efficient way to establish a directional bias in $USO.

Why use a ZEBRA instead of a long call?

• Eliminates Time Decay: Because this strategy avoids options with high extrinsic value, there’s no theta decay eating away at profits.
• Creates a Synthetic Stock Position: The trade structure gives you almost +100 delta, meaning it behaves similarly to owning 100 shares of $USO.
• Capped Downside Risk: The most you can lose is the cost of the strategy, unlike stock ownership where the risk is theoretically unlimited.
• No Margin Requirements: There aren’t any short naked puts or calls. Because ZEBRA is a defined-risk trade, it does not carry the same margin requirements as selling naked options.

Here’s the setup I’ll be looking at for $USO:

1. Sell one at-the-money (ATM) Call – This helps reduce extrinsic value, balancing the trade.
2. Buy two Calls with ~70 Delta Each – These provide high delta exposure while maintaining limited risk.

Example:

• Sell one $ATM call (delta ≈ 0.50)
• Buy two $70-delta calls (delta ≈ 0.70 each)
• This results in roughly +100 net delta, giving me nearly the same directional exposure as holding shares

Profit Potential: Unlimited—just like being long stock.

Max Risk: Limited to what I pay for the ZEBRA structure (the initial debit).

Trade management

If oil prices rebound:

• The ZEBRA structure will gain value similarly to holding shares, with gains accelerating as $USO rises.
• Since there’s no theta decay, I don’t have to worry about time working against me.

If oil prices consolidate:

• The trade remains intact, and I can wait for a breakout because I’m not fighting time decay.

If oil prices decline further:

• My max loss is limited to the initial debit paid for the trade, unlike owning shares outright where the downside is larger.

With oil prices reacting to geopolitical tension, economic uncertainty and Fed policy decisions, I see a potential opportunity for a tactical long trade on $USO. Instead of buying stock outright, I’m using the ZEBRA strategy to establish synthetic long exposure with limited downside and no time decay risk.

This trade structure enables me to capture upside in oil while ensuring my risk is well-defined, making it an efficient strategy in uncertain market conditions.

I’ll be watching the next Fed decision, U.S. oil inventory reports and any further geopolitical developments for additional catalysts that could affect this trade.

Want to learn more about ZEBRA? Check out the Liz and Jenny breakdown here: The ZEBRA Options Strategy | Tastytrade.

Errol Coleman appears on the tastylive network shows Today’s Assignment and Trades on the Go.