Contango haters, why aren't you picking up the free money?

Discussion in 'Commodity Futures' started by Daal, Feb 10, 2009.

  1. Daal

    Daal

    Just came across this article
    http://www.indexuniverse.com/blog/5362-uso-oil-usl.html
    Also in this forum I ocassionaly hear folks claiming going long in contango is a bad bet
    They argue that as the front expires and you get the second contract it will show a tendency to drift towards the last spot price and that will lose you money

    Lets think about what this implies, it implies there is a risk premium for shorting contangos. Historical data suggests that also but it could be easly due the fact that it HAD exist a profit for either contango or backwardation in the data, it would too unlikely that the profits would be split equally. All that could change in the future, plus contango in some commodities dont show that premium at all

    The author recommends using USL intead of USO because it spreads its bets over 12 months instead of just the front. He doesnt seem to understand there would be a free $ arbitrage by long USL short USO with mininal exposure to oil
     
  2. Looks like his article was a success......volume on USL yesterday was 293k vs. the 3month avg. of 13,000.

    Hopefully volume picks up on USL so we wont get killed on slippage while trading this item

    Eric