USO , huge discount

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

  1. Aaron

    Aaron

    I don't like to count my chickens before they hatch. PM me your email address and I'll send you the monthly results as soon as they are available on Friday. Or keep an eye on our performance page at http://www.schindlertrading.com/index.php?page=performance

    Aaron Schindler
    Schindler Trading
     
    #11     Aug 28, 2006
  2. moo

    moo

    This is correct. Unlike GLD and SLV, which own gold and silver, USO does not own physical oil, but oil futures instead. Due to the structure of the market it is very expensive currently to own USO as a long-term investment. So, unfortunately for all the conspiracy theorists, there is no fraud nor conspiracy here.

    I think the reason for this unusual market structure (i.e. contango) is that there are a lot of hedge funds investing in oil futures right now. As they can't own physical oil, they have to hold futures. And every month they are rolling their positions over, selling the front month and buying the next month contracts. This keeps the "oil curve" upward-sloping. And it also explains the plentiful inventories showing up in weekly data.

    My bet is that this oil bull has run its course. There are just too many bulls in this market. At least it is very difficult to make any money going long oil, as you have to fight the $1/month roll cost. But if you short oil you get the benefit of this same $1 as a huge margin for error.
     
    #12     Aug 29, 2006
  3. Here's the answer:

    USO is NOT holding spot oil futures, but rather they are positioned in the (lower volatility) back months.
    No free money arb here. Keep looking...
     
    #13     Aug 29, 2006
  4. huh ?

    -. At least it is very difficult to make any money going long oil, as you have to fight the $1/month roll cost. But if you short oil you get the benefit of this same $1 as a huge margin for error.-

    I do not think this is correct ... can you give me an example
    on how being short front month on expiry gets you bonus money
    with crude oil
     
    #14     Aug 29, 2006

  5. First off - spot futures? I'm not familiar with spot futures. I know spot markets and I know future markets. If there are spot futures, please keep me updated.

    Second, look at this link

    http://www.unitedstatesoilfund.com/uso_holdings.aspx


    It's quite different from what you said. All they hold is sept crude.

    Seems to me, a sixth grader can run this fund.

    They are getting 5% percent on cash investments.

    Seems to be POORLY tracking the price of crude.

    Advantage: if crude goes to 60$ barrel, you break even.
     
    #15     Aug 29, 2006
  6. Good point there. USO does not own physical oil but the futures. I agree with your post. The oil run is near its end with all the bulls in it, and I agree it will be difficult to make money on the long side. With the roll yield being at where it is, it seems oil only needs to go up less than 13 bucks for the year for you to make money on the short. You sold me on this idea, im shorting in my long term account :)
     
    #16     Aug 29, 2006
  7. rough algebra not taking into account a sig. change in inter-month spreads:


    Y = [(64.88*1.05)/2] + [(70.50+X)/2] - (13.20/2)
     
    #17     Aug 29, 2006
  8. <i>First off - spot futures? I'm not familiar with spot futures. I know spot markets and I know future markets. If there are spot futures, please keep me updated.</i>


    -->Spot month futures= Front (closest) month.


    <i>Second, look at this link

    http://www.unitedstatesoilfund.com/uso_holdings.aspx
    It's quite different from what you said. All they hold is sept crude.</i>

    ----->No, that's not correct:

    <img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=1182960>
     
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    #18     Aug 29, 2006
  9. moo

    moo

    Assume that spot oil is at $70, and stays there for the rest of the year. Since futures are higher than that, but must equal spot at expiration, they must (slowly) decline towards $70 as expiration approaches.

    In reality the prices fluctuate, but the spread between futures and spot still remains and keeps narrowing as expiration approaches.


    UncleTom, can you explain your algebra?
     
    #19     Aug 29, 2006
  10. hi moo ... I apologize if this "works" in the real energy trading
    world at this moment in time
     
    #20     Aug 29, 2006