USO Oil Reverse Split – How it Works 

 

What is USO oil actually?

Let’s start out by clarifying a key concept.  The United States Oil (USO) fund is actually an ETF, which trades on a stock exchange.  Many people use the term “USO oil stock”, which is inaccurate.  Let’s unbox this concept a bit further.

This company aims to replicate the performance of the oil commodity, which trades on a futures exchange.

How does USO replicate performance?  By buying the oil futures directly so you do not have to, and splitting the units fractionally among shareholders.

 

USO Oil Reverse Stock Split

As of this morning, shareholders of the USO oil ETF are realizing the effects of an 8 for 1 reverse stock split.

This means that USO oil price will be multiplied by 8, while your holdings are divided.

Before the split, USO traded at approximately $2.50 cents.  Let’s assume you owned 80 shares prior to the split.

 

Pre USO oil split position:

  • Own 80 shares
  • Trading at $2.50 per share
  • Total market value: $200 USD ($2.50 x 80 shares)

 

Post 8 for 1 USO oil split position:

  • Now own 10 shares of USO
  • Trading at $20 per share
  • Total market value: $200 USD ($20 x 10 shares)

 

As you can see, a reverse stock split is an offsetting transaction.  The purpose is to increase the share price, while proportionally reducing the quantity you own.

So, you might be wondering why would the USO oil fund managers want to do this?

Let’s discuss this point next.

 

Why Do a Reverse Stock Split?

Before you understand the need for a reverse stock split, let’s talk about how we got here in the first place.

Crude oil is an oversupplied market.  This has been the case for years.  In March, COVID19 spread like a wildfire which led to stay at home order.  These orders shut down the economy abruptly over night.

The collapse and crash of crude oil occurred due to an ill timed double black swan event.  An oil supply war, and a collapse of demand.

As USO oil invests in crude oil, the prices of the ETF have crashed dramatically in conjunction with the commodity.  This is by design and was supposed to happen.

In fact, below is a daily comparison chart showing both the price of crude oil versus the USO ETF. You can see that, since 2018, the USO oil fund has tracked the price of crude nearly in 100% correlation.

(In the chart below, USO is the candle chart and crude oil futures are the orange line.)

USO oil fund

 

Share prices dropped to a low of nearly $2.00 a share, from approximately $11.

Every public company is listed on an exchange.  The USO fund is listed on the CBOE exchange, which means they need to maintain certain criteria to stay listed.  If you want to read the full criteria, click here to visit the CBOE website.

If they cannot meet these conditions, they will be delisted, which would be disastrous for their entire fund.  Any company trading under $5 per share, is considered to be a penny stock.

This is one of the main reasons USO had to reverse split, which is widely ignored by most media outlets.

 

USO Stock Options Impact of a Reverse Split

The calculation for options is very similar.

Let’s assume you own 8 contracts of USO, pre split, with a strike of $5.

 

Pre USO oil split options position:

  • Own 8 contracts
  • Strike price of $5

Post 8 for 1 USO oil split options position:

  • Now own 1 contract
  • Strike price of $40

 

As you can see, options are also kept whole during splits.

Everything else remains the same, and based on market conditions.  Time value, delta and all greeks included.

If you happen to have 10 contracts, you will own a “fractional” contract.  So, even if the math calculation doesn’t work out clean on your position – you will be kept whole.

Questions about Your Position?

In these times, it is always best to contact your broker who holds your position.  They will be able to give you specific answers and guidance.

I hope you enjoyed this article.

 

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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.