Many people believe that the prices of crude oil futures and unleaded gas futures are too cheap at the current levels for various reasons but do not know how to invest in energy futures and options.
What is a crude oil futures option? A crude oil futures option is the right but not the obligation to buy (call) or sell (put) 1000 barrels of crude oil for a certain price (strike price) by a certain period of time (expiration date). The option buyer pays a premium for this right. A hypothetical example might be buying 1 June $65 crude oil futures call option for a premium cost of $1000. Keep in mind that premium cost does not include commissions and any related fees. The premium paid and the commissions and fees are the maximum risk of capital loss that an option purchaser might sustain. The person speculating on this particular crude oil futures call option is hoping for the price of June crude oil futures to increase enough for them to sell (offset) the option for a profit anytime before the option expires.
There are various futures contracts that are closely related to crude oil futures because they are made from crude oil such as heating oil futures and unleaded gas futures. An unleaded gas futures option gives the option buyer the right but not the obligation to buy (call) or sell (put) 42,000 gallons of unleaded gas for a certain price (strike) by a certain period of time (expiration date). A hypothetical example might be buying 1 July $1.80 unleaded gas futures call option for $900. Once again, the premium cost does not include commissions and fees. The premium paid and the commissions and fees are the maximum risk of capital loss that an option purchaser might sustain. The option speculator is hoping for the price of July unleaded gas futures to increase enough for them to sell (offset) their option for a profit anytime before the option expiration date.
Crude oil futures options and unleaded gas futures options investing are very risky and are not suitable for all investors. Buying options can lead to the loss of the entire amount invested.
Why are crude oil futures contract prices quoted in barrels and heating oil futures and unleaded gas futures contracts are quoted in gallons? One barrel of crude oil is 42 gallons so the contracts are actually leveraging the same amount of petroleum or the products. It is less confusing to have different contract quotes for the distillates of crude oil and the crude oil itself.
The author of this article has 13 plus years of commodity option trading experience and wishes to educate investors so they can make prudent investment decisions based on a deeper knowledge of the option markets before they risk their hard earned money. Future option trading is not for everyone and only risk capital should be used when investing. Visit http://www.tkfutures.com/education.htm to learn more.
Friday, June 12, 2009
Investing in the Oil ETF: Go Liquid or Pass on the Gas? (by B. Patrick Regan)
The launch of the US Oil Fund (ticker: USO) gave investors an easy way to invest in the hottest commodity of the day: oil. Still reeling from the post-Katrina boom that has kept gas prices over $2.00 a gallon, investors bought over five million shares in the ETF's first day.
The concept is an easy sell: it's a fund that invests in oil contracts with the purpose of mirroring the value of West Texas Intermediate (WTI) light, sweet crude oil at a ratio of one barrel contract per share. One share, one barrel.
Easy, right?
Riiiiiiiight...
The Well-Known Risks of Commodities
Everyone knows about the risks of investing in commodities, but it is worth repeating the main points.
Commodities prices fluctuate quickly and widely. An announcement from any OPEC country could send oil prices up or down 10% within minutes. With every word spoken by the prime minister of Iran oil pushes upward.
Oil investments are also subject to operational risks: environmental hazards such as oil spills, leaks, fires and discharges of toxic chemicals.
This is not rational long-term investing. This is short-term, profit-taking trading, and it should be treated as such.
Commodities have long been considered a hedge against market fluctuations, not a primary holding. Now they are suddenly an investment strategy. Any commodity -- oil, gold, pork bellies -- should be considered a hedge against a bond or equity market downturn.
Like gold and other commodities, oil futures have enjoyed a long bull market in the post 9-11 world, but commodities and hard assets tend toward modest gains over the long term. And they are all subject to sudden, harsh corrections.
Specific Risks of the Oil ETF (USOF)
Though any commodity investment involves certain general risks, the US OIL Fund (USOF) ETF has specific risks that make it particularly unstable.
Price Risk - This is the risk that the NAV of the fund will not equal the price of WTI light, sweet crude, as the fund intends. The fund's prospectus outlines three reasons why this could happen:
Market Risk - The trading price per share of the ETF may not correlate with the value of the NAV, which is calculated by dividing the total value of the fund's assets by the number of shares. The ETF, then, could trade at a premium (more than the underlying assets are worth) or a discount (less than the value of the underlying assets).
Management Risk - The NAV may not match the value of the benchmark oil contract. The underlying assets of the fund, then, could stray from the value of the contracts the fund trades.
Futures Arbitrage Risk - The price of the benchmark does not closely correlate with the price of WTI light, sweet crude. In this case, futures contracts may differ in price from the underlying asset (barrels). Any one of these risks would be enough to make USOF a questionable investment, but there's more...
Strategy Risk - Rather than profit from speculative short-term futures trading, the USOF tries to track the price of the underlying assets (oil), using futures contracts. This is all to be carried out by the General Partner (manager), Victoria Bay Asset Management, described in the prospectus as "lean staffed," which "relies heavily on key personnel to manage trading." As the prospectus notes, "there is no assurance that the General Partner will successfully implement this investment strategy." Like stocks, futures contracts can be over- or undervalued with respect to their underlying assets. Further, the fund can be manipulated by short-term trading tactics (i.e. short selling). This fund's reliance on a "lean-staffed" manager which does not actively manage the fund's assets, but rather attempts to track an index price, does not bode well for the fund.
Legal Risks
Aside from the organizational risks, the USOF has two outstanding legal claims to contend with.
NYMEX - The New York Mercantile Exchange (NYMEX) is the exchange through which WTI light, sweet crude is traded. As the publisher of the price of that asset, NYMEX is challenging USOF's use of the price as a benchmark. NYMEX is seeking a licensing agreement with the fund, or threatening legal action to prevent the fund from using it as a benchmark. According to the prospectus, "USOF is unable to determine what the outcome from this matter will be...This may adversely affect USOF's ability to achieve its investment objective."
Goldman Sachs - One of the world's largest investment banks, Goldman Sachs, has two patents pending which may be infringed upon by the fund's methodology. Both patents define a means for creating a pooled fund that trades futures contracts and issues the equity interest of the fund to investors through publicly traded shares. Should the patents be granted, USOF may be held liable for patent infringement, if it were to "operate as currently contemplated after the patents were issued." If either of these patants is granted, the fund may be liable for royalties, which would come from the fund's assets.
These are complicated matters for attorneys in the specialized areas of Intellectual Property and Finance, and this author is unqualified to make a determination as to the merits of the claims made. As investors, however, we are all qualified to say, "nope, too much risk for me." Pure oil contracts are less risky than this fund. Should USOF be held liable for either of these claims, any damages or royalties will be taken directly from the fund's investors, which could negatively affect performance by 4-5 basis points (0.4%-0.5% annually, which can negate any positive performance or exacerbate the losses of a hedging investment).
Conflicts of Interest
The fund makes no bones about it: a whole section of its prospectus is entitled, "The General Partner Has Conflicts of Interest." The management of this fund has other investment interests that may be of more importance (to them) than this fund. "For example," it states, "a conflict may arise because the General Partner and its principal and affiliates may trade for themselves."
Essentially, this is an open invitation for the management to prioritize their own holdings (and holdings they have a vested interest in) over the USOF holdings.
Better Options Abound
Usually there are better options around, no matter what you're looking at. But when it comes to USOF, there are few worse options.
The management has not proven itself as a consistent performer. The underlying commodity is near an all-time high. The strategy is subject to pending legal decisions.
There are better options in mutual funds that specialize in commodities producers. And even these funds should not comprise more than 5% of an individual's portfolio.
If you still feel the need to invest in the "pure oil play" that's getting all the press these days, please read The Prospectus before investing.
B. Patrick Regan is a freelance writer and a staff writer at StocksAndMutualFunds.com. He had no vested interest in any securities discussed in this article at the time of publication.
The concept is an easy sell: it's a fund that invests in oil contracts with the purpose of mirroring the value of West Texas Intermediate (WTI) light, sweet crude oil at a ratio of one barrel contract per share. One share, one barrel.
Easy, right?
Riiiiiiiight...
The Well-Known Risks of Commodities
Everyone knows about the risks of investing in commodities, but it is worth repeating the main points.
Commodities prices fluctuate quickly and widely. An announcement from any OPEC country could send oil prices up or down 10% within minutes. With every word spoken by the prime minister of Iran oil pushes upward.
Oil investments are also subject to operational risks: environmental hazards such as oil spills, leaks, fires and discharges of toxic chemicals.
This is not rational long-term investing. This is short-term, profit-taking trading, and it should be treated as such.
Commodities have long been considered a hedge against market fluctuations, not a primary holding. Now they are suddenly an investment strategy. Any commodity -- oil, gold, pork bellies -- should be considered a hedge against a bond or equity market downturn.
Like gold and other commodities, oil futures have enjoyed a long bull market in the post 9-11 world, but commodities and hard assets tend toward modest gains over the long term. And they are all subject to sudden, harsh corrections.
Specific Risks of the Oil ETF (USOF)
Though any commodity investment involves certain general risks, the US OIL Fund (USOF) ETF has specific risks that make it particularly unstable.
Price Risk - This is the risk that the NAV of the fund will not equal the price of WTI light, sweet crude, as the fund intends. The fund's prospectus outlines three reasons why this could happen:
Market Risk - The trading price per share of the ETF may not correlate with the value of the NAV, which is calculated by dividing the total value of the fund's assets by the number of shares. The ETF, then, could trade at a premium (more than the underlying assets are worth) or a discount (less than the value of the underlying assets).
Management Risk - The NAV may not match the value of the benchmark oil contract. The underlying assets of the fund, then, could stray from the value of the contracts the fund trades.
Futures Arbitrage Risk - The price of the benchmark does not closely correlate with the price of WTI light, sweet crude. In this case, futures contracts may differ in price from the underlying asset (barrels). Any one of these risks would be enough to make USOF a questionable investment, but there's more...
Strategy Risk - Rather than profit from speculative short-term futures trading, the USOF tries to track the price of the underlying assets (oil), using futures contracts. This is all to be carried out by the General Partner (manager), Victoria Bay Asset Management, described in the prospectus as "lean staffed," which "relies heavily on key personnel to manage trading." As the prospectus notes, "there is no assurance that the General Partner will successfully implement this investment strategy." Like stocks, futures contracts can be over- or undervalued with respect to their underlying assets. Further, the fund can be manipulated by short-term trading tactics (i.e. short selling). This fund's reliance on a "lean-staffed" manager which does not actively manage the fund's assets, but rather attempts to track an index price, does not bode well for the fund.
Legal Risks
Aside from the organizational risks, the USOF has two outstanding legal claims to contend with.
NYMEX - The New York Mercantile Exchange (NYMEX) is the exchange through which WTI light, sweet crude is traded. As the publisher of the price of that asset, NYMEX is challenging USOF's use of the price as a benchmark. NYMEX is seeking a licensing agreement with the fund, or threatening legal action to prevent the fund from using it as a benchmark. According to the prospectus, "USOF is unable to determine what the outcome from this matter will be...This may adversely affect USOF's ability to achieve its investment objective."
Goldman Sachs - One of the world's largest investment banks, Goldman Sachs, has two patents pending which may be infringed upon by the fund's methodology. Both patents define a means for creating a pooled fund that trades futures contracts and issues the equity interest of the fund to investors through publicly traded shares. Should the patents be granted, USOF may be held liable for patent infringement, if it were to "operate as currently contemplated after the patents were issued." If either of these patants is granted, the fund may be liable for royalties, which would come from the fund's assets.
These are complicated matters for attorneys in the specialized areas of Intellectual Property and Finance, and this author is unqualified to make a determination as to the merits of the claims made. As investors, however, we are all qualified to say, "nope, too much risk for me." Pure oil contracts are less risky than this fund. Should USOF be held liable for either of these claims, any damages or royalties will be taken directly from the fund's investors, which could negatively affect performance by 4-5 basis points (0.4%-0.5% annually, which can negate any positive performance or exacerbate the losses of a hedging investment).
Conflicts of Interest
The fund makes no bones about it: a whole section of its prospectus is entitled, "The General Partner Has Conflicts of Interest." The management of this fund has other investment interests that may be of more importance (to them) than this fund. "For example," it states, "a conflict may arise because the General Partner and its principal and affiliates may trade for themselves."
Essentially, this is an open invitation for the management to prioritize their own holdings (and holdings they have a vested interest in) over the USOF holdings.
Better Options Abound
Usually there are better options around, no matter what you're looking at. But when it comes to USOF, there are few worse options.
The management has not proven itself as a consistent performer. The underlying commodity is near an all-time high. The strategy is subject to pending legal decisions.
There are better options in mutual funds that specialize in commodities producers. And even these funds should not comprise more than 5% of an individual's portfolio.
If you still feel the need to invest in the "pure oil play" that's getting all the press these days, please read The Prospectus before investing.
B. Patrick Regan is a freelance writer and a staff writer at StocksAndMutualFunds.com. He had no vested interest in any securities discussed in this article at the time of publication.
Earn $100 for Every 10 Cents in the Price of Fuel (by David D. Wells)
I’m about to reveal a strategy that has made thousands of dollars for my clients just recently. There are no “fool proof” methods for making lots of cash. There are however, methods that can generate more cash more quickly than you can imagine. I’ll also tell you the best time to take advantage of this opportunity.
By now everyone is aware of the increase in the price of fuel. The price we pay at the gas pump seems to get more and more press coverage. That is because this is considered an extreme situation. Successful traders look for extreme situations. It’s a setup for a very profitable situation.
OPPORTUNITY
There are a number of ways to take advantage of this opportunity. The way I suggest is to look at crude oil. Fuel is made from crude oil. On the commodity exchange (a place where commodities are bought and sold) every ten cents (dime) in the price change of crude oil equals $100. Why every 10 cent move in the price of crude oil equates to $100 deserves more of an explanation than I have room in this article. This is explained in detail in the Money Tracks System at www.themoneymotivator.com.
PROFITS
Recently the price of crude oil changed $1.14 in one day. What that means is if the price changed $1.14 that equated to a profit potential of $1,140 in one day. You could have made that amount of money while you continued to go about your daily life. How would making $1000 a day change your life?
TIMING
Now let’s talk about timing and why I love weather forecasts. Natural disasters happen. I don’t want them to happen but they happen. So you may as well turn lemons into lemonade. Here’s what I mean, if a hurricane is headed for the Gulf Coast that means that crude oil will probably rise in price. Smart traders know this and they position themselves to profit from the rising price of crude oil.
REASON
The reason the price of crude oil goes up is because a major portion of oil rigs are on the Gulf Coast and they can get damaged by the hurricane or maybe temporarily shut down. This shut down of the oil rigs means there is less oil in supply. Less oil in supply means people must pay a higher price to get the oil that is available. So one of the best times to buy crude oil is when a hurricane is headed towards the Gulf Coast. Remember gas is made from crude oil. When you earn your profits be sure to help hurricane victims.
Finally, you see there really is a simple way to make money. I’m sure you have thought to yourself, “there’s got to be a better way”. Now you know you were right; there is a better way. People similar to you are making money while taking vacations, relaxing at the beach and spending time with their loved ones.
For more information on how to profit from current events visit www.themoneymotivator.com and order Wealthy Investing Secrets today.
To Your Continued Wealth-building,
David
© Copyright David D. Wells. This Article and all contents are proprietary products. All rights reserved. You are welcome to forward the entire Newsletter to anyone interested as long as it is not edited in anyway and includes the Resource Box.
Often referred to as The Money Motivator, David D. Wells is passionate about helping people Crack the Wealth Code to become money magnets. Let him teach you the techniques used to help Hillary Clinton turn $1,000 into $100,000 in the course of a year.
By now everyone is aware of the increase in the price of fuel. The price we pay at the gas pump seems to get more and more press coverage. That is because this is considered an extreme situation. Successful traders look for extreme situations. It’s a setup for a very profitable situation.
OPPORTUNITY
There are a number of ways to take advantage of this opportunity. The way I suggest is to look at crude oil. Fuel is made from crude oil. On the commodity exchange (a place where commodities are bought and sold) every ten cents (dime) in the price change of crude oil equals $100. Why every 10 cent move in the price of crude oil equates to $100 deserves more of an explanation than I have room in this article. This is explained in detail in the Money Tracks System at www.themoneymotivator.com.
PROFITS
Recently the price of crude oil changed $1.14 in one day. What that means is if the price changed $1.14 that equated to a profit potential of $1,140 in one day. You could have made that amount of money while you continued to go about your daily life. How would making $1000 a day change your life?
TIMING
Now let’s talk about timing and why I love weather forecasts. Natural disasters happen. I don’t want them to happen but they happen. So you may as well turn lemons into lemonade. Here’s what I mean, if a hurricane is headed for the Gulf Coast that means that crude oil will probably rise in price. Smart traders know this and they position themselves to profit from the rising price of crude oil.
REASON
The reason the price of crude oil goes up is because a major portion of oil rigs are on the Gulf Coast and they can get damaged by the hurricane or maybe temporarily shut down. This shut down of the oil rigs means there is less oil in supply. Less oil in supply means people must pay a higher price to get the oil that is available. So one of the best times to buy crude oil is when a hurricane is headed towards the Gulf Coast. Remember gas is made from crude oil. When you earn your profits be sure to help hurricane victims.
Finally, you see there really is a simple way to make money. I’m sure you have thought to yourself, “there’s got to be a better way”. Now you know you were right; there is a better way. People similar to you are making money while taking vacations, relaxing at the beach and spending time with their loved ones.
For more information on how to profit from current events visit www.themoneymotivator.com and order Wealthy Investing Secrets today.
To Your Continued Wealth-building,
David
© Copyright David D. Wells. This Article and all contents are proprietary products. All rights reserved. You are welcome to forward the entire Newsletter to anyone interested as long as it is not edited in anyway and includes the Resource Box.
Often referred to as The Money Motivator, David D. Wells is passionate about helping people Crack the Wealth Code to become money magnets. Let him teach you the techniques used to help Hillary Clinton turn $1,000 into $100,000 in the course of a year.
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