The ETF That Benefits Most from an Uncertain Egypt

02/01/2011 7:07 am EST

Focus: ETFS

Among a seemingly endless sea of red in last Friday’s trading session, oil stood as a safe haven for bulls fleeing the equities scene. While the turmoil in Egypt acted as a thorn in the side for equity investors, it turned out to be just what the doctor ordered for the oil patch, which had fallen in seven out of the previous eight trading sessions.

The flurry of activity sparked by the unrest in Egypt can be easily viewed using the United States Oil Fund (USO). With over 30 million shares traded, last Friday marked the second-highest volume day in USO since establishing its bear market bottom in early 2009.

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The surge in volume wasn’t isolated to just the underlying, however; USO options also experienced a noticeable increase in demand. All told, the OVX, commonly referred to as “The Oil VIX,” increased over 11% on the day, reaching levels not seen since mid-November.

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Though traders also flocked to snatch up SPX options (VIX was up 24%), I suggest the underlying reason was different. While traders playing USO options were likely seeking ways to profit from further upside in oil, those buying SPX options were likely seeking protection against a continued downfall in equities.

Going forward it will be interesting to see if oil continues to be the recipient of increased demand this week. As long as there is uncertainty in the Middle East, oil prices and USO will continue to rise.

By Tyler Craig, trader and blogger,

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