Credit Suisse Lures Traders to an Oil Bet Linked to USO

(Bloomberg) -- Credit Suisse Group AG is doubling down on an oil trade linked to a fund at the epicenter of the historic price crash.

The Swiss bank is cashing in on the infamy of the U.S. Oil Fund LP, known as USO. It's issuing fresh shares in a note that lets clients bet the $4 billion product will see calmer days after its 80% plunge this year.

Using what's known as a covered-call strategy, the X-Links Crude Oil Shares Covered Call exchange-traded note, ticker USOI, is structured to outperform if USO stays locked in sideways trading. A prospectus published last week showed the bank is adding 2.2 million shares, worth $54 million at their stated principal amount. The note's indicative value on that date was around $4 a share, which would make the offering worth around $9 million.

The world's largest oil ETF captured headlines last month after retail investors got burned with ill-timed bets on a crude rebound. Amid negative prices, USO was forced to re-tool its methodology and took other extraordinary steps to prevent shuttering.

Now as the dust settles, Credit Suisse reckons it can tap fresh demand for traders seeking steady income from investing in oil futures.

Despite this week's bounce in crude prices, oil looks stuck in a quagmire of weak demand and oversupply. Meanwhile USO's issuer has upended how it tracks the commodity -- potentially capping both its gains when front-month oil futures rise and price swings going forward.

All of that looks set to boost the Credit Suisse strategy.

“USO implied volatility is obviously quite high, for good reason,” said Benn Eifert, chief investment officer at QVR Advisors. “But USO methodology changes have stabilized it somewhat, reduced left tail risk and reduced the volatility it should experience.”

Income Hunt

The Credit Suisse product holds shares of USO while simultaneously writing call options. The premium generated from selling those contracts is designed to provide a steady income. Since its 2017 inception, it's outperformed its bigger sibling by around 17% on a total return basis.

The strategy isn't without its risks. Like all covered-call products, it will underperform if USO goes on a tear. Also, if implied volatility of the ETF drops, it will earn less premium from selling the options contracts, hitting its dividend.

A spokesman for Credit Suisse declined to comment.

As investor interest in USO drops off in the wake of the tumult, the Swiss bank may be betting that investors will flock to its note as a viable alternative. Recent data from online trading platform Robinhood shows a drop in customers holding the beleaguered fund.

“The retail interest in USO has finally started to fade,” said Ole Hansen of Saxo Bank.