Profiting when oil prices decline

U

Uncle Rico

1,000+ Posts
This is not a ******* thread talking about how high oil prices will go or any of that other ****. The theme is here is that if oil prices revert to historical levels, how would one profit?

I know you can short USO but I'm thinking of other plays. Buy transportation stocks? Buy the dollar? Suggestions?
 
I would go w/ what txeconomist says...

going short is difficult, and I trade for an institution for a living.

by going long an inverse etf, it changes the risk profile....

I have seen many people carried out on stretcher, and have had enough of my of short side tries take me out to have learned how to short and how not to short.

FWIW....i am in the middle of a short side try in oil right now thru derivatives (not meant for the individual)...

I was a tad early as i started legging into a position around 113 thinking we would see 100 before 125....but hedged myself sufficiently enough to finance my short side try.

Also I don’t trade my own capital, I use my firms capital and thus have way different margin requirements...my trades impact my pad’s P&L, which directly impacts my firms P&L, and thus my bonus structure

You could buy the USD, but you as an individual should probably stay away from the FOREX market. You can buy an the UUP ETF which is USD up...it is trade weighted
 
froghorn,

you sound like a big fan of the inverse etf. i'm assuming you like that for the individual player. as a L3 cfa candidate (i have to disclose this sort of ****) i obviously understand tons of theory but don't really have the $ to invest on my own in any sort of complex capacity.

that said, what do you think about junk bond etfs? I ask because as a stock does it have correlation issues? obviously this security is going to track a portfolio of junk bonds but i just didn't know if certain etfs have seen equity type correlations regardless of the underlying assets purchased. food for thought i guess.
 
Uncle...

Yeah I would imagine you understand way more than the ave individual about finance...hell maybe even more than me.

I just assume everybody is an individual until I know otherwise because some of my posts are meant for education purposes in so much as showing real time trades, and I wouldn't want somebody to go out and try some of the things I put out there.

ETFs, in my mind, are superb trading tools; I would never use them as an investment tool...

FWIW…I don't just like the inverse ETFs for individuals, I use them all the time but only when I feel I have an edge (feel) over a shorter period of time…and might not have the flexibility capital wise to go short…not to mention my risk models might not allow for a short b/c of others I have out there.

That doesn’t mean I don’t want to take advantage of a great trade. I have done this a ton using FXP as a way to short CHINA without lugging unmanageable positions that could potentially have too much overnight risk on the short side

There is nothing worse than carrying a position overnight in something like that where gap risk could rip your face off.

The reason why I say use an inverse ETF is because until you have really gone short an individual name or an index and felt the pain of being wrong or merely just early, you don't fully understand risk. On paper you might but not in a real world trade.

You know going long you can only lose your investment, when you go short your potential losses are unlimited….

Margin calls are not fun to get...

As for the junk bond etfs, I haven’t really torn into the math and how well they correlate to the underlying assets…so I am not the right person to ask about those….
 
excellent post frog. i'm not a day trader and really haven't ever spent the time looking at historical oil prices and all the details that drive price one way or the other. i've also never done all the technical analysis on it either. i just simply think that oil will not stay at these prices long-term and there is a way to profit from it.

that said, i don't necessarily like the inverse etf because I don't want to get myself in a habit of thinking i can time the market or be early. for my personal portfolio i try to pick companies i like long-term that have been beaten down by recent events such as select financials. i bought ITB at roughly $17 and change which tracks us home construction. it's one of my few "time the market" plays and while it has worked i don't want to get too confident in my abilities.

agreed that the liquidity aspect of the etf is greatness to keep you from getting stuck holding a bag of **** while you are catching zzz's over night.
 
RE: “thanks, but isn't this roughly the same as shorting USO? no offense but i was expecting more from an economist.”

Yea, but it is twice as good. DUG- trades at double the inverse of crude... so with this, from what I understand you will have at least a little bit of leverage.

Also, if you start trying to find round about ways to make money in anticipation that crude falls, you expose yourself to more risk and more complications. Why take on multiple risks in favor of one?

If you have time and abilities to follow crude in real time, put 10k into an interactive brokers account and trade a mini. I don’t really recommend this, but you wanted another way…with this I think you are leveraged 500X.

Basically, if you want to short crude… do that. I wouldn’t try to get fancy making a bunch of trades with your broker being the only person who makes any money…
 
Yea ive never really looked to see exactly how DUG works or its management fees... I just like the idea of it being leveraged 2X...
 
as txecon said above...

these inverse ETFs are usually 200% the inverse of that index

For instance take SDS it "should' trade 2x's the inverse of the daily return of the S&P 500..give or take a couple bps

so today the SPX closed down about 0.40%...the SDS closed up 1.02%...not perfectly 2x's but you get the point

but that leverage knife cuts both ways...
 
You might want to check out "DCR" DCR is a instrument that basically tracks oil down. It has an underlying value (NAV) according to the oil price and a market value. Market value of DCR is based on NAV and investor sentiments. So they are not always same.

2-DCR's NAV price calculation = (120-Oil price)/3
if oil is $110 then DCR's NAV is $3.33. If oil is $120 then Nav is $0.
But the market value could be different and fluctuate in a day. When you buy DCR, you pay market value.

3-DCR will expire on June 25. If you hold it into expiration, on 3 July, you will be paid underlying value of your shares on that day. So, for example, if crude is $100 at the time, you will be paid $6.66 per share. If it is over $120 you will be paid nothing. So if oil keeps dropping you can keep your shares into the expiration and still get paid. If you sell before the expiration, you'll be paid the market value.

4-Definetely read over the information provided in its website. www. macroshares.com
Check the prospectus, and termination information.
 
I looked @ DCR....

just couldn't figure out a way to hedge it....like i can do with derivatives..

FWIW...we are unwinding our short side try and going flat oil...

just ringing the cash register...
 
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