Margin Cost, USL ETF using Margin vs CL futures

Discussion in 'Energy Futures' started by Cyrix, Feb 12, 2011.

  1. Cyrix



    Say I have a $50k account and want to invest in about $97k of 12month oil, which one has lower financing cost? $97K of USL using margin, or rolling one 12 month CL contract (also considering bidask during rolling)?
  2. bone

    bone ET Sponsor

    Margin aside there is considerable roll/maintenance/construction slippage in many ETF Commodity Funds, lots of supporting evidence and articles floating around on the topic.
  3. Cyrix



    Now if we only compare financing costs, ETF (say SPY) using margin vs leverage using futures (like ES), same account size and after-leverage size, which one in general has higher monthly costs?
  4. bone

    bone ET Sponsor

    Go to the Nymex website, Crude Oil future, then select the performance bond margin link to Friday's updated excel sheet. Find out from your stock broker what margin you will have to post to carry the ETF. Go to both instrument's contract specifications in order to convert the physical to financial valuations of each. Voila. My guess is that it is probably cheaper to use the futures once you equalize the buying power of both instruments including capitalization and slippage.
  5. the CL is one of the best trading vehicles on the planet...great $$ potentional per even 1 contract...I would seriously consider soley focusing on the CL...forget USO, OIH, USL...just my 3.4 cents
  6. bone

    bone ET Sponsor

    One of the common complaints I see is people complaining that the CL future made an X % move, and the ETF made a < X % move in the same timeframe. The common perception is that the slippage management to maintain the ETF basket is a point of concern.
  7. McBet


    So you plan paying someone 30 dollars per hour to invest in oil? If you are an investor, do yourself a favor and find something less costly to carry. Like oil company stocks or Brent crude oil futures for example. Unless you fancy losing double digit returns per year in carry costs embedded in those option-like instruments called US energy futures (which has been only exposed by the funds investing in them). It should not cost more than a few cents to carry an oil futures contract from one month to another. CL 'normally' costs dozens of times more than that. And abnormally (e.g. currently) it costs hundreds of times more than that ($4k per month, $200 per trading day, $30 per hour). And it can get to $10 or more. Available only at Cushing! Avoid land-locked oil like the plague, there are much cheaper alternatives.

    Edit: Diversify: do not invest in any single commodity more than 30% of your money (and I mean the contract value, not merely margin). Control risk: do not tolerate drawdowns larger than 30%, as they can be seriously demotivating (50% gain required just to break even).