Discussion in 'Stocks' started by lwlee, Nov 9, 2007.

  1. lwlee


    I was thinking of shorting USO or buying some puts. I want to make a 6 month bet that crude will be lower. I don't want the volatility of shorting CL futures.

    - anyone doing this now?
    - from what I read, the ETF should closely track the front month futures, but I see CL Dec is currently at 95.13 and the USO is trading at 73.85. Why the wide gap?
    - any better proxy for crude oil?
  2. Google it:

    USOF invests in futures contracts for West Texas Intermediate (WTI) light, sweet crude oil, but may also consist of other types of crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels that are traded on the New York Mercantile Exchange, ICE Futures or other the United States and foreign exchanges (collectively, Oil Futures Contracts). USOF may also invest in other oil-related investments, such as cash-settled options on Oil Futures Contracts, forward contracts for oil, and over-the-counter transactions that are based on the price of oil and other petroleum-based fuels, Oil Futures Contracts and indices based on the foregoing (collectively, Other Oil Interests).

    I have held long and short positions on USO for a while, and as an etf it does follow the price trend closely, but sometimes might be off as much as .5% from cl future prices.
  3. lwlee


    0.5%? It's off the futures by 22% right now. Doesn't seem like a good proxy.

  4. USO is like an index of total return of crude oil since USO's inception. When we were in heavy contango half a year ago, the index losses 2-3 bucks every month when they have to roll. The 74 bucks you see would essientally equate what you will get if you keep rolling your futures position every month. USO is a good proxy and it reflects the true return of crude since inception. From now on, you will gain every month you roll because of backwardation.
  5. lwlee


    Thanks nice explanation.
  6. which is fascinating because it only took a very short time for the market to be in contango to backwardation.. Look at the chart and you'll see the spread took about a month to make that move. July-August is what to look for.

    The moral of the story? If the spreads reverse and the market returns to contango, the USO as a short will be quite excellent.
  7. lwlee


    Ok, I bought some Apr 67 puts for 3.00. Let's see how it works out.