The Organization of the Petroleum Exporting Countries will meet in Vienna on Wednesday, aiming to implement a deal outlined in September to cut about 1 million barrels per day (bpd) in output from around 33.82 million bpd in October.

The outcome of the meeting is far from certain as key OPEC members appear to disagree over details of the plan and some analysts have suggested the meeting may fail to reach a deal.

While oil prices are in for volatility no matter what happens at the meeting, failure to reach a deal would unleash massive volatility for crude prices and in turn for the United States Oil Fund (USO), said Naeem Aslam, chief market analyst at Think Markets UK Ltd in London.

"If there is no deal we expect oil prices to drop by 20 – 30 percent in coming weeks," Aslam said.

Rising uncertainty has driven up volatility expectations in the option market and USO's 30-day implied volatility, a gauge of the risk of moves in the fund's shares, rose to 55 percent on Tuesday, the highest since late February, according to options analytics firm Trade Alert.

Options traders expect the fund's shares to swing by 7.5 percent in either direction by Friday, according to Trade Alert.

On Tuesday the fund's shares fell as much as 4.5 percent, tracking a slump in oil prices, on signs that leading oil exporters in OPEC were struggling to agree on a deal to cut production.

While traders have bid up volatility there has not been a big rush to hedge, MKM Partners derivatives strategist Jim Strugger said.

"Leading up to this, positioning in USO was really on the bullish side," he said.

Calls outnumber puts by a 1.4-to-1 margin, the highest in two months, according to Trade Alert data.

Buying a call conveys the right to purchase shares at a fixed price in the future, while buying puts conveys the right to sell shares.

While the strength of activity in USO calls is a bullish signal, it could spell trouble if crude prices slip.

"If they (investors) are caught flat-footed that would exacerbate the post-event response," MKM Partners' Strugger said.

(Reporting by Saqib Iqbal Ahmed; Editing by David Gregorio)

By Saqib Iqbal Ahmed