Good discussion on this trade here: http://seekingalpha.com/article/68064-arbitrage-opportunities-with-oil-etfs
Kevin, Thanks for starting the thread. I did the trade this morning. The only point I would make is that I think the ratio is 2.4 DCR for each USO. USO is 0.8 a barrel of oil and DCR is 1/3 a barrel of oil. So 0.8 * 3 = 2.4
By my calculations there is still a 90% premium in the DCR price. At the time of writing, oil (CL) is at 109.90, and DCR is at 6.40, when it should only be 3.37.
Pages discussing this trade: 11 March 2008 http://seekingalpha.com/article/68064-arbitrage-opportunities-with-oil-etfs 10 March 2008 http://www.princeofwallstreet.com/2008/03/10/crude-awakening-oil-arbitrage-and-speculation/#comments 22 Feb 2008 http://seekingalpha.com/article/65710-macroshares-oil-funds-offer-arbitrage-opportunity 14 Jan 2008 http://www.investingminds.com/social/blogs/gary/index.php?pst_id=100113 14 Nov 2007 http://www.investingminds.com/social/blogs/gary/index.php?pst_id=100092 9 Nov 2007 http://seekingalpha.com/article/53581-the-world-s-worst-etf Jan 2007 http://nakedshorts.typepad.com/nakedshorts/2007/01/crude_etf_criti.html
14 March 2008 http://www.investingminds.com/social/blogs/gary/index.php?pst_id=100138 Discusses June 2008 termination dates and the possibility of oil over 120
ETF connect - info about DCR http://www.etfconnect.com/select/fundpages/etf_funds.asp?MFID=170372 Similar page showing just the premium / discount http://www.etfconnect.com/select/fu...h=200px&dtatyp=premdiscall&dtatyp=premdiscall
18 March 2008 http://hardassetsinvestor.com/index.php?option=com_content&task=view&id=736&Itemid=6 Good charts at the bottom of the article showing the premia / discount over time
DCR 10-K http://biz.yahoo.com/e/080331/dcr10-k.html Macroshares notes that there is some correlation between oil contango / backwardation and the premium / discount at which the shares are trading.
From Marketwatch: AS CRUDE OIL PUSHES $110, the whole world seems to be betting -- or is it praying? -- that it must come down. Trading volume in the (DCR 6.85, +0.36, +5.6%) (DCR), a security that rallies if oil falls, has surged to more than 10 times that of (UCR: UCR 33.15, -0.25, -0.7%) (UCR), which rises with oil. Traders flock to DCR for the market's favorite game today -- Pick the top in oil prices! -- and to hedge oil stocks in their portfolios against a crude decline. But the pile-up has propelled DCR prices well above its value, presenting an exploitable opening that did not escape the analysts at Bespoke Investment Group. UCR tracks the price of oil, and its net asset value is derived by dividing the current forward crude price by 3. The net asset value of DCR is in turn calculated by subtracting UCR's net asset value from $40. With crude at $110 Friday, "Oil Up" shares were trading near 33, below its net asset value of $36.67. In contrast, "Oil Down" is fetching 6.85, more than double its net asset value of $3.33. If this lopsided tilt isn't lure enough, here's another catch: If crude closes above $111 for three consecutive days, these macro shares will stop trading, and investors ultimately will receive distributions based on the respective net asset values at termination. If that happens, DCR holders presumably could stand to lose a bundle. "Too many people playing oil's downside have driven up DCR prices," says Bespoke founder Justin Walters. Also, investors have far fewer ways to ride an oil slide than they do a surge, and the downside vehicles get understandably crowded. Betting on UCR and against DCR could pay off, if oil stays for a few days above $111. Did we mention that oil is now at $110?