The oil price dropped suddenly on Thursday to a loss of around 4%. Whenever oil suffers a sudden drop I look to trade a bounce back. On Thursday I bought DIG at 41.59 happy in the knowledge that not only was there a 4% drop that was likely to bounce back, but also that US oil facilities were being shutdown ahead of several approaching storms.
The next day oil fell almost another 4%.
Normally I would have doubled into an oil trade at this point, but at the moment I have two much capital committed between the XIV, DIG and DAX Trades. I held the original position and have just closed it this evening for a profit of 207 USD after costs.
Oil continues to be a dependable trade, I look forward to closing the next level of the XIV trade in order to free the capital for future double down opportunities in oil. A double down on Friday would have netted closer to 800 dollars.
This trade provides an interesting demonstration of 'compounded loses'. Oil is now back to or even slightly above its closing price on Wednesday, however DIG is still a long way short of a full recovery. I have saved the 5 Day chart for DIG and will use it in a future page explaining compounded loses in the 'Why is it so difficult to make money trading' section. In the meantime I am happy enough with the 207 USD profit.
Showing posts with label USO. Show all posts
Showing posts with label USO. Show all posts
Wednesday, September 7, 2011
Friday, August 19, 2011
How To Trade Oil - Is Dig Better Than USO ?
The short answer is no.
DIG is a leveraged ETF which attempts to return two times the daily return of oil. I have just taken a position in DIG at 38.75 and will be intending to exit this position in a few hours time. There are well documented issues with holding any of the leveraged ETFs over time, the chief problem is that the leverage compounds losses. There is also a built in value decay with any of the ETFs that are based on rolling derivative contracts. But to take advantage of a short term bounce DIG will do just fine.
I have marked my entry point on the chart, USO has 5% to go to get back to Wednesdays close, DIG has 10%. On the basis that we didn't all just park our cars and start walking to work, I will be taking my chances on DIG for the next few hours.
DIG is a leveraged ETF which attempts to return two times the daily return of oil. I have just taken a position in DIG at 38.75 and will be intending to exit this position in a few hours time. There are well documented issues with holding any of the leveraged ETFs over time, the chief problem is that the leverage compounds losses. There is also a built in value decay with any of the ETFs that are based on rolling derivative contracts. But to take advantage of a short term bounce DIG will do just fine.
I have marked my entry point on the chart, USO has 5% to go to get back to Wednesdays close, DIG has 10%. On the basis that we didn't all just park our cars and start walking to work, I will be taking my chances on DIG for the next few hours.
Saturday, August 13, 2011
How To Trade Oil - USO
I have already posted why I believe trading oil is more likley to lead to profitable trades than alternatives like currencies, stocks, markets, metals etc.
See USO - Saudi's Got My Back where you may detect that I am not all that excited about using USO as the means to trade oil.
I have two charts with which I can illustrate two of the short comings of USO. This first chart is a comparison of the performance of USO against some popular oil industry ETFs that contain stocks rather than oil futures contracts.
You can see that the ETFs IEZ, OIH, XLE are more highly geared to the oil price than USO. There are lots of effects at work to create this, but one is that each company has a base cost to product oil lets say 50 dollars a barrel. If the oil price moves from 80 to 85, the value of oil after costs has gone from 30 to 35, an increase of 16%, but the price of oil itself has only increased 6.25 %. This is a massive over simplification, not all of the 16% is within the producer, it will be spread around the supply chain, but it illustrates why oil companies provide a leveraged play on the oil price.
The next chart shows the long term underperformance of USO against the same selection of oil industry ETFs. As a long term hold USO is a disaster. If you had bought any of the ETFs One year ago, you are still holding onto 20% profit, with USO you are down about 5%.
The reason for this is the way that USO is structured. It uses futures contracts to track the price of oil. The fund never takes delivery of physical oil but instead rolls the contracts. Basically this means that as the contract approaches expiry, the contract is sold and the funds are reinvested in oil further out in the future. This is an expensive strategy, there are transaction costs and time decay elements which eat away at the fund over time leading to a guaranteed under performance.
So far USO has been a disappointing trade, my entry points have well chosen given the weeks price action but the returns are minimal.
As the charts illustrating the long term underperformance of USO show, it is not a position to hold for any length of time. I will be closing this position soon out of boredom with the lack of action.
There is one glimmer of hope for this trade, if the markets blow up on Monday I will double down by selling USO and reinvesting the funds in DIG a far more exciting play on oil.
For information on all the ETFs Mentioned, link below -
IEZ, OIH, XLE, USO, DIG Detailed Summary - Yahoo Finance
See USO - Saudi's Got My Back where you may detect that I am not all that excited about using USO as the means to trade oil.
I have two charts with which I can illustrate two of the short comings of USO. This first chart is a comparison of the performance of USO against some popular oil industry ETFs that contain stocks rather than oil futures contracts.
You can see that the ETFs IEZ, OIH, XLE are more highly geared to the oil price than USO. There are lots of effects at work to create this, but one is that each company has a base cost to product oil lets say 50 dollars a barrel. If the oil price moves from 80 to 85, the value of oil after costs has gone from 30 to 35, an increase of 16%, but the price of oil itself has only increased 6.25 %. This is a massive over simplification, not all of the 16% is within the producer, it will be spread around the supply chain, but it illustrates why oil companies provide a leveraged play on the oil price.
The next chart shows the long term underperformance of USO against the same selection of oil industry ETFs. As a long term hold USO is a disaster. If you had bought any of the ETFs One year ago, you are still holding onto 20% profit, with USO you are down about 5%.
The reason for this is the way that USO is structured. It uses futures contracts to track the price of oil. The fund never takes delivery of physical oil but instead rolls the contracts. Basically this means that as the contract approaches expiry, the contract is sold and the funds are reinvested in oil further out in the future. This is an expensive strategy, there are transaction costs and time decay elements which eat away at the fund over time leading to a guaranteed under performance.
So far USO has been a disappointing trade, my entry points have well chosen given the weeks price action but the returns are minimal.
As the charts illustrating the long term underperformance of USO show, it is not a position to hold for any length of time. I will be closing this position soon out of boredom with the lack of action.
There is one glimmer of hope for this trade, if the markets blow up on Monday I will double down by selling USO and reinvesting the funds in DIG a far more exciting play on oil.
Three months price action DIG vs USO (45% top to bottom vs 22% top to bottom)
For information on all the ETFs Mentioned, link below -
IEZ, OIH, XLE, USO, DIG Detailed Summary - Yahoo Finance
Friday, August 12, 2011
USO - Saudi's Got My Back
The only trade I consistently make money on is oil.
The gains outway the losses as there is a constant upward pressure on the price, this pressure comes in many forms -
1) Its a fundamentally dangerous business, every stage from extraction to transport, refining and distribution is dangerous, leading to short term supply disruptions and higher prices. A storm in the gulf of mexico increases the oil price, an attack on a Nigerian pipeline increases the price, routine maintenance on a Canadian pipeline can increase the price.
2) OPEC. Anyone can moan and whinge about the oil price, I don't, OPEC has my back. If the price falls too far too fast due to falling demand, OPEC will reduce supply creating artificial price pressure limiting my losses and creating a new buying opportunity.
I could go on with the reasoning, but lets get to the trade.
I usually use UK Warrants, such as RH22 Call Warrant On Brent Crude At 90
Right now I am not comfortable with the spread between Brent and WTI (West Texas Intermediate) and I see the premium at which Brent trade compressing. For this reason I am using USO to trade oil for now.
I initially took a position in USO at 34.28 intending to add if it continued to fall based on my conviction that even under a bout of selling pressure the upward bias remains.
From 34.28 the priced dropped as low as 30.48, I took advange of this to double my investment at the new price of 30.98. At this reduced price I actually bought more shares as I could afford more for the same investment amount.
The current price in pre market trade is 33.70 my break even price excluding costs is 32.56. I will be happy to exit the position at anything over 35 I would have been looking for a higher price originally, but given the size and speed of recent moves and the fact that I was able to successfully double down I am not going to be a hero on this one.
At the current pre market price profit ex costs is just shy of 400 USD, at 35 its 760.
The gains outway the losses as there is a constant upward pressure on the price, this pressure comes in many forms -
1) Its a fundamentally dangerous business, every stage from extraction to transport, refining and distribution is dangerous, leading to short term supply disruptions and higher prices. A storm in the gulf of mexico increases the oil price, an attack on a Nigerian pipeline increases the price, routine maintenance on a Canadian pipeline can increase the price.
2) OPEC. Anyone can moan and whinge about the oil price, I don't, OPEC has my back. If the price falls too far too fast due to falling demand, OPEC will reduce supply creating artificial price pressure limiting my losses and creating a new buying opportunity.
I could go on with the reasoning, but lets get to the trade.
I usually use UK Warrants, such as RH22 Call Warrant On Brent Crude At 90
Right now I am not comfortable with the spread between Brent and WTI (West Texas Intermediate) and I see the premium at which Brent trade compressing. For this reason I am using USO to trade oil for now.
I initially took a position in USO at 34.28 intending to add if it continued to fall based on my conviction that even under a bout of selling pressure the upward bias remains.
From 34.28 the priced dropped as low as 30.48, I took advange of this to double my investment at the new price of 30.98. At this reduced price I actually bought more shares as I could afford more for the same investment amount.
The current price in pre market trade is 33.70 my break even price excluding costs is 32.56. I will be happy to exit the position at anything over 35 I would have been looking for a higher price originally, but given the size and speed of recent moves and the fact that I was able to successfully double down I am not going to be a hero on this one.
At the current pre market price profit ex costs is just shy of 400 USD, at 35 its 760.
Introduction
Part of the reasoning for starting this blog is to reduce the number of reckless trades I make. If I can't explain the reasoning for entering a trade here, I won't make the trade.
Since deciding to take this approach to policing my trading I have opened a number of positions which I originally published on Twitter. The twitter trades are -
XIV,RG56,RI29, I also have a position in USO which I have not previously published.
Yahoo finance - XIV
RBS Warrants UK - RG56
RBS Warrants UK - RI19
Yahoo Finance - USO
Since deciding to take this approach to policing my trading I have opened a number of positions which I originally published on Twitter. The twitter trades are -
XIV,RG56,RI29, I also have a position in USO which I have not previously published.
Yahoo finance - XIV
RBS Warrants UK - RG56
RBS Warrants UK - RI19
Yahoo Finance - USO
Subscribe to:
Posts (Atom)