USO / OIL ETCs and the Contango Effect - futures io
futures io futures trading



USO / OIL ETCs and the Contango Effect


Discussion in Commodities

Updated
      Top Posters
    1. looks_one SMCJB with 3 posts (6 thanks)
    2. looks_two Schebbi with 3 posts (2 thanks)
    3. looks_3 jokertrader with 1 posts (2 thanks)
    4. looks_4 suko with 1 posts (1 thanks)
      Best Posters
    1. looks_one SMCJB with 2 thanks per post
    2. looks_two jokertrader with 2 thanks per post
    3. looks_3 suko with 1 thanks per post
    4. looks_4 Schebbi with 0.7 thanks per post
    1. trending_up 1,911 views
    2. thumb_up 12 thanks given
    3. group 7 followers
    1. forum 8 posts
    2. attach_file 2 attachments




Welcome to futures io: the largest futures trading community on the planet, with well over 125,000 members
  • Genuine reviews from real traders, not fake reviews from stealth vendors
  • Quality education from leading professional traders
  • We are a friendly, helpful, and positive community
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts
  • We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

(If you already have an account, login at the top of the page)

 
Search this Thread
 

USO / OIL ETCs and the Contango Effect

(login for full post details)
  #1 (permalink)
Cologne/Germany
 
Experience: Intermediate
Platform: MetaTrader 4
Trading: YM, FDAX
 
Posts: 6 since Jun 2017
Thanks: 8 given, 7 received

Hi Everybody,

When I saw the Oil Price trading at new lows, I ran into an ETC (Wisdom Tree WTI unfortunatelly as a non US Citizen I cant buy the USO) and bought some Shares in the hope that oil Price will recover over the Long run and I can participate in higher prices.

Unfortunatelly, I wasnīt aware of the current Situation in the Underlying product which is obviously the Crude Oil Futures market. The Futurecontracts for the upcoming months trading at higher Prices than the current contract.


MAY 20 18.24

Jun 20 25.14

Jul 20 29.52

Aug 20 31.32

Sep 20 32.20

OCT 20 33.03

Nov 20 33.64

DEC 20 33.95 (Source: CME Group)

The Problem is, that the Oil Fund has to rollover their Position from month to month to represent the oil market. So for e.g. last week the United States Oil Fund (USO) had to sell the may 20 contract at around $20 and bought the Jun 20 contract at $25. So there was a spread of +$5. This Situation is called Contango.

So now here is the Question. Must the Jun 20 Contract now climb 25% (because $5 spread represents 25%) to just break even for the fund?
What happens when the jun 20 contract declines to $23 and the JUL will trade at $27 at the next rollover? And this happens over and over again? So at the end is it possible that in December the Crude Oil Price will be for example at $35 but the fund Price didnīt move or worst case declined in Price and I will have lost Money?


What would be a good alternative to participate in rising Oil Prices?


Thanks a lot for your help in Advance!

Started this thread Reply With Quote
The following user says Thank You to Schebbi for this post:

Journal Challenge February 2021 results (so far):
Competing for $1500 in prizes from Topstep
looks_oneSBtrader82 's Trading Journalby SBtrader82
(154 thanks from 29 posts)
looks_twoJust BEING a Trader: Letting Go!!by iqgod
(111 thanks from 32 posts)
looks_3Wisdom is Emptinessby Mtype
(68 thanks from 25 posts)
looks_4Deetee’s DAX Trading Journal (time based)by Deetee
(31 thanks from 16 posts)
looks_5Journal for peanuts1956by peanuts1956
(23 thanks from 13 posts)
 
 
(login for full post details)
  #2 (permalink)
Legendary Market Wizard
Houston, TX
 
Experience: Advanced
Platform: Trading Technologies
Broker: Primary Advantage Futures. Also ED&F and Tradestation
Trading: Primarily Energy but also a little GE, GC, SI & Bitcoin
 
Posts: 3,966 since Dec 2013
Thanks: 3,257 given, 7,766 received

No but the Math isn't in your favor.

Let say you bought $10000 USO when May was $18.24. Your $10000 investment theoretically represents 549 barrels. Now USO rolls from May to June and sells their 549 barrels at $18.24 an buys 397 barrels at $25.14, So now you still one $10000 worth of oil but you own 28% less barrels.

This is what they call negative roll yield.

Reply With Quote
The following 5 users say Thank You to SMCJB for this post:
 
(login for full post details)
  #3 (permalink)
NYC, NY
 
Experience: Intermediate
Platform: Sierra Qtrader TT
Broker: Amp/CQG/TT, Optimus, ADM
Trading: Mainly CL. Spread researcher currently
 
Posts: 633 since May 2013
Thanks: 535 given, 338 received


Unless you buy USO after it buys the June contracts which it already has and sell before it sells the June contracts/buy July contracts which based on what they usually do will start around May 13 or so????

FYI I am not in it or will be in it rather trade future flys for direction if I get the itch

Visit my futures io Trade Journal Reply With Quote
The following 2 users say Thank You to jokertrader for this post:
 
(login for full post details)
  #4 (permalink)
Atlanta, Georgia
 
Experience: Beginner
Platform: Sierra Chart
Trading: MES
 
jakobe's Avatar
 
Posts: 112 since Sep 2016
Thanks: 69 given, 90 received

The USL ETF slightly solves this issue. They average their contract holdings into all 12 month contracts to mitigate the contango effect. The downside is the spot price doesn't move as sharply since the fund is composed of 12 month crude oil contracts. I'd recommend checking it out however.

Reply With Quote
The following user says Thank You to jakobe for this post:
 
(login for full post details)
  #5 (permalink)
Kyoto, Japan
 
Experience: Intermediate
Platform: TW TOS LiveVol
Broker: TD, TW, IB, Saxo
Trading: VXX, VIX, SPY
 
suko's Avatar
 
Posts: 1,304 since Oct 2013
Thanks: 825 given, 1,390 received


SMCJB View Post
No but the Math isn't in your favor.

Let say you bought $10000 USO when May was $18.24. Your $10000 investment theoretically represents 549 barrels. Now USO rolls from May to June and sells their 549 barrels at $18.24 an buys 397 barrels at $25.14, So now you still one $10000 worth of oil but you own 28% less barrels.

This is what they call negative roll yield.

@Schebbi

Essentially it's the same story with most of these franken product ETFs. With bonds that means TBT, with vol it's VXX.

If you spend some time to really understand this mechanism, then you can apply it elsewhere, and you can take advantage of it big time.

For example, you can use that roll yield as a tailwind to your directional assumption by shorting ETFs like TBT or VXX.


"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
Follow me on Twitter Visit my futures io Trade Journal Reply With Quote
The following user says Thank You to suko for this post:
 
(login for full post details)
  #6 (permalink)
Legendary Market Wizard
Houston, TX
 
Experience: Advanced
Platform: Trading Technologies
Broker: Primary Advantage Futures. Also ED&F and Tradestation
Trading: Primarily Energy but also a little GE, GC, SI & Bitcoin
 
Posts: 3,966 since Dec 2013
Thanks: 3,257 given, 7,766 received


jakobe View Post
The USL ETF slightly solves this issue. They average their contract holdings into all 12 month contracts to mitigate the contango effect. The downside is the spot price doesn't move as sharply since the fund is composed of 12 month crude oil contracts. I'd recommend checking it out however.

Agreed. Only slight F***Ed rather than completely F***ed. But being fair, if you don't access to futures USL is a better option than USO.

Reply With Quote
The following user says Thank You to SMCJB for this post:
 
(login for full post details)
  #7 (permalink)
Cologne/Germany
 
Experience: Intermediate
Platform: MetaTrader 4
Trading: YM, FDAX
 
Posts: 6 since Jun 2017
Thanks: 8 given, 7 received


SMCJB View Post
Agreed. Only slight F***Ed rather than completely F***ed. But being fair, if you don't access to futures USL is a better option than USO.

In the picture you can see the result of the contango effect. It results in a huge tracking Error. The Chart shows the CL1! and the USO over time. It seems that USO is only good in tracking the downphases, but gives almost no reward in uphases.



I sold my ETC yesterday morning and invested in oil shares for example in Texas Pacific Land Trust (TPL). I think this is the better bet for the long run.

Attached Thumbnails
Click image for larger version

Name:	usl.png
Views:	274
Size:	106.8 KB
ID:	296062  
Started this thread Reply With Quote
 
(login for full post details)
  #8 (permalink)
Cologne/Germany
 
Experience: Intermediate
Platform: MetaTrader 4
Trading: YM, FDAX
 
Posts: 6 since Jun 2017
Thanks: 8 given, 7 received

Just to make it complete. The USL seems really to be the better choice over the long run. It catches the upmoves much better.


Started this thread Reply With Quote
The following user says Thank You to Schebbi for this post:
 
(login for full post details)
  #9 (permalink)
Legendary Market Wizard
Houston, TX
 
Experience: Advanced
Platform: Trading Technologies
Broker: Primary Advantage Futures. Also ED&F and Tradestation
Trading: Primarily Energy but also a little GE, GC, SI & Bitcoin
 
Posts: 3,966 since Dec 2013
Thanks: 3,257 given, 7,766 received


Schebbi View Post
In the picture you can see the result of the contango effect. It results in a huge tracking Error. The Chart shows the CL1! and the USO over time. It seems that USO is only good in tracking the downphases, but gives almost no reward in uphases.



I sold my ETC yesterday morning and invested in oil shares for example in Texas Pacific Land Trust (TPL). I think this is the better bet for the long run.


Schebbi View Post
Just to make it complete. The USL seems really to be the better choice over the long run. It catches the upmoves much better.


Excellent illustration of negative roll yield in effect.

Reply With Quote


futures io Trading Community Traders Hideout Commodities > USO / OIL ETCs and the Contango Effect


Last Updated on April 21, 2020


Upcoming Webinars and Events
 

NinjaTrader Indicator Challenge!

Ongoing
 

Journal Challenge w/$1500 prizes from Topstep!

February
 

Identifying Setups & Targets Using Profile Charts w/Trevor & Tradovate

Feb 25
 

Battlestations! Show us your trading desk - $1,500 in prizes!

March
     



Copyright © 2021 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts