WARNING: Read me before buying OOO, page-7

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BullishToTheSky

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17/04/20

10:06

Post #: 44094456
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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.

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I'm still confused in this "in contango" thing.

So are you saying there's still a difference between the future price of oil and the spot price of oil? Does this also mean that you can only make money once you know where the bottom is?

I just thought you buy oil where you see you can make a profit. For example, If I buy 2000 units @$5.00 per share for $10000 with the expectation that this investment will be worth $20000 (or $10.00 per share) in 6 months from now if the oil price rises from $20 USD per barrel to $40 USD per barrel.

The above information is just an example. Just want to know what you guys actually mean.

OOO Price at posting: $19.36 Sentiment: None Disclosure: Not Held
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WARNING: Read me before buying OOO, page-7

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