USO , huge discount

Discussion in 'Stocks' started by Nasdaq5048, Aug 28, 2006.

  1. I guess the dude who manage the ETF isnt doing a very good job in tracking crude oil.

    Front month crude is 70.50, and USO is 64.88. Arent they suppose to track front month crude?

    Pretty easy way to fraud some money through ETF
  2. Sounds like a risk free arbitrage opporunity, nice find! I will post in this thread with pics once I bought my new beachside mansion and yacht with this.
  3. silk


    Nobody wants to own a close end fund with high expenses that tracks oil with no gurantee that it will trade 1:1.

    Thus 10% discount is where it settles.

    Many closed end funds trad at 10-20% discounts. However, i would think that USO would trade at a smaller discount than the current.

    Could be a decent buy here. Not only is crude right above support, but also this is the widest discount we have seen in USO.
  4. here is an excerpt from an SEC filing about "USO"

    -Tracking USOF's Benchmark. USOF seeks to manage its portfolio such that changes in its average daily NAV, on a percentage basis, closely track changes in the average daily price of the benchmark crude oil futures contract, also on a percentage basis. Specifically, USOF seeks to manage the portfolio such that over any rolling 30-day period, the average daily change in the NAV is within a range of 90% to 110% (0.9 to 1.1), of the average daily change of the benchmark crude oil futures contract-
  5. Who knows what the fund manager is doing? It seems a bit fraud to me. Will u ever check their books? They probably did some off exchange transaction that no one understands anyway. With the contango and everything else, it's not hard to write off any losing bets and blaming the cost of carry.

    This thing is strange. I need to send an email to
  6. S2007S


    i posted about USO in the stocks section today on how cheap it looks, however a while back i brought up the same question on why it doesnt track the barrel....

    here is something from April 2006:

    Investors considering purchasing the oil ETF should tread lightly, warns Bianco Research in a Monday note. The research group points out that, according to the fund's prospectus, the average daily change in the ETF's net asset value for any period of 30 straight valuation days comes within 10%, plus or minus, of the average daily change in the benchmark oil futures contract over the same period. "A 10% tracking error? Try that in the equity index ETF world," writes the research group. The divergence is already in play Monday: While oil prices were up more than a buck, the USO ETF shed nearly 1% to $67.76.
  7. here are todays numbers

    from their website

    Monday, August 28, 2006
    USO Data
    Ticker USO
    CUSIP 91232N 10 8

    AMEX Closing Price $64.88
    NAV $64.95

    that discount does not appear to be so big to me
    based on this info
  8. The point is how can the NAV be so different when their job is to follow the movement of the underlying?

    Is it possible that they write off trading losses on the USO?
  9. Aaron


    I posted on 4/25 and 6/12:

    For various reasons USO can't and doesn't represent any specific amount of oil. It is constructed so that the _percentage change_ in the price of USO will track that of crude futures. The actual price of USO will eventually drift further and further from the price of crude as the front month futures contract price jumps at rollover each month but USO does not.

    Notice that November crude futures are trading at a $1.10 per barrel premium to the front month, October futures. Come the third week of September at the roll from October to November futures, all of a sudden CNBC will be reporting crude prices $1.10 (or whatever the spread is at that time) higher but the USO price will still be the same and will be at an even greater discount to the price of crude.

    This "roll yield" currently adds up to $1.10 x 12 = $13.20 per year. If you are long USO or crude futures for the next year, and the roll yield stays the same, the front month price of oil has to go up by more than $13.20 per barrel for you to make money. If you are short oil futures or USO, the price of oil just has to go up less than $13.20 (or go down) for you to make money.

    Historically oil was in backwardation where the back months traded at a discount to the front month and someone long the futures made money on the rolls. That's how it got the name roll yield and is a big part of why holding a long position in commodities or commodity indexes (which are largely energies) has been profitable historically.

    I think the reason for the large contango we are currently seeing is due to a well supplied spot market and concerns about future supply. That means a low (relative) price for the front month futures contract and a risk premium built into the back months.
    The risk premium gradually decays (like an option premium) as the future approaches expiration.

    Aaron Schindler
    Schindler Trading
  10. Hey Aaron, how's the fund doing this month (if you're allowed to talk about it)?
    #10     Aug 28, 2006