The December 22 .50 puts were trading .25 today. That's essentially saying the market believes there is a better then 50/50 chance of liquidation (if you think there will be some value left in the fund after liquidation) or that 1 current share will essentially worth zero through reverse splits.
Back in college days our teacher showed us a bill from one of PanAm Airline debt holders. They were was trying to take a him(tax attorney) to collections because he was the last known shareholder of record.
I read the prospectus (just got it today, but should have looked it up), sure wish I had prior to investing... but I think I understand it now. If I pick up correctly, this fund is basically an oil contracts futures fund, which I do think should be named as such, but I get it... buyer beware. Seems like a hedge on any potential news that oil futures will be better the month after next, than they are next month, to basically cover a current months loss? Although I keep rethinking how that makes sense...hmm. Likely a higher risk gamble on a spike? Liquidation is basically a force market sale which if the fund owner chooses to do while the fund has value, you get that value. Given the length of time this fund has been in the market, its "unlikely" to liquidate, but owners are basically banking the fund owner is close enough to the oil markets to in essence, predict the future, right? Get in, get out, its a bit of a hedge fund... and morons like me who bought in assuming it was representing the price of oil, learned a tough lesson... at this point, its a gamble on Junes contracts that the fund manager bought them low, and the market reopens and the price goes up. Am I close? Still learning here but also fascinated by the dynamics. Im cool if you roast me, I will learn from it. Rethinking, Im now curious whether it isnt better just rolling the dice on the Dont Pass line?
WTI Where are you getting these liquidation levels ($10.00 then $6.40) for USO? WTI Jun20 touched $6.50 today before it went limit offer...then it came off limit really violently. Was USO forced to liquidate some of its position when we dipped below $10? We went from $10 to $6.50 in a hurry, which felt like someone was liquidating.
These crude oil ETFs and ETNs are poorly structured and ticking time bombs in this environment. CME needs to create a liquid cash settled version of CL for traders and speculators to address the panic selling from delivery risk.
I pulled them out of my ass so it's not a hard and fast number. I have not read the liquidation part of the prospectus so keep that in mind. What I do know is this. Right now the June contract has a margin requirement of $6,400. That means, if the price of oil falls below $6.40, the fund would face a margin call. Their only option would be to liquidate. Because of the number of contracts they hold, I would be surprised if they would wait to be under margined to start liquidating. I imagine they have procedures in place with their clearing firm along with the exchange and CFTC in regards to a potential how they would close positions to cover a margin call. On a positive note, since the May contract had a final settlement of ~$10, that bodes well for the June contract staying positive over the next few weeks. The negative prices we saw on Monday were more of a long squeeze than the true value for WTI. (PS: I know ~20% of their holdings are in the July contracts so that does give them some more breathing room than the $6.40, but I am trying to keep it simple here.)
USO is now trading at a 36% premium of it's NAV as of yesterday. This is because they need approval from the SEC to issue more shares. Until then, market makers are unable to exchange creation units with the fund to keep the NAV in line with the share price. If you want to take a gamble and go long oil, there has never been a worse time to use USO to do so.
Short USO, go long CLM0 (future). I can imagine a lot of people will be trying to do this which could make the stock hard to borrow. Imagine this potential scenario: You short USO, go long the future so have no directional risk other than the premium change in NAV. The premium goes from 36% to 200% for USO because there is a lot of stupid money. No big deal though, you know eventually it will go back to trading at it's NAV and you didn't over leverage your trade so you can take the heat. Then your broker calls you and tells you, "Hey, the shares you were borrowing to sell short have been recalled so you have to buy back your position today." Now you are fucked. You have to buy back at the 200% premium and there is nothing you can do about it because you can't have a naked short and no shares are available to borrow. I am not saying this would be likely to happen, but it is a real risk you would need to consider when making this trade.