WARNING: Read me before buying OOO, page-3

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BullishToTheSky

1,731 Posts.

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17/04/20

07:49

Post #: 44091155
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Originally posted by corgifan: ↑

Everyone, you need to understand this product.

The oil market is currently in EXTREME CONTANGO (futures curve is upward sloping). This means this product is a very expensive (and therefore risky) to buy and hold in the current environment.

OOO trades futures to get its exposure to oil and needs to roll the futures during the month to maintain its exposure.

Example: Right now the spot futures contract for light sweet crude is approximately $20. The next month is $26. If the $6 spread stays, in just one month this fund will lose 23% (6/26). Yesterday the spread was 30% (ie its volatile). Right now that means the price of OOO will fall 23% in 1 month just to maintain its oil exposure (i.e. for you to break even in one month the price of oil will need to rise 23%). This is known as the cost of carry.

The oil market has been in contango for some time now.

Simple maths will tell you if contango lingers for another few months you'll dust most of your capital on holding costs alone e.g. 3 months will cost you over 50%.

So unless you know something about the oil market that no one else knows over a very short time frame this should be no more than a day/week trade.

Someone far smarter than me wrote this up better than I can explain, but I urge you to read the link below before buying.
https://seekingalpha.com/article/4337417-uso-strongly-decline-due-to-roll-yield

When contango goes away, different story. But right now you are literally getting eaten alive in holding costs every day.

Happy investing.

Expand

Thanks for the info corgifan. I just thought the SP moves with the WTI Crude Oil price.

Would you recommend Oil CFDs instead as a more beneficial alternative (compared to ETFs)?

Last edited by BullishToTheSky: 17/04/20

OOO Price at posting: $19.36 Sentiment: None Disclosure: Not Held
2 Upvote

0 Great analysis

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