Play with fire and you get burned – that’s what they say. I guess it doesn’t appear to be smart to leverage yourself (2x’s) with crude oil futures through an ETN but that’s precisely what I started to do in December. My tool of choice: DXO Oil Double Long ETN
- December 12, 2008: Dollar falls, Crude up
- December 02, 2008: Dollars, T-Bonds and Crude Oil
- November 26, 2008: Oil a Value Buy?
It’s still the trade that intrigues me the most. The official buy signal that we look for on this blog has not triggered so yes, I am playing with fire. I considered the position a “value play” in December and that is the truth but I also admit that I have not followed my traditional rules of entering a position.
I grabbed shares that represented 25% of my typical position size so my risk is greatly limited but I am looking to add shares, only this time with an official buy signal. I did not get a signal to enter DXO but the current charts are showing that potential with a jump above the moving average or abreakout on the point and figure chart.
A strong move above $3.75 on the point and figure chart will be a major buy signal, especially if it is accompanied with heavy volume. Buyers and sellers are struggling to take control of the commodity as the economic turmoil attempts to give us some type of direction across all markets.
I’ll be honest; it might be too early (still) as the chart could drag along the bottom of the moving average for months before it decides to pick a direction. However, when it does, I’ll be ready to pounce and add shares to my first position.
Let’s wait and see but don’t let this one off of you watch list.
What is a point and figure chart? Click here to learn!
Dear Chris
I am mainly writing to tell you I love Bob. I had written and never mentioned it. Labs are my favorite. As for oil. I too am long on oil and gold. Both will fly.
Hope to see the Perrunas in Greece so I can show them some Greek hospitality.
Kindest regards
thalia
Keep your thoughts coming – too few of them. We want to hear more from you
Thanks for the follow-up on DXO, The middleast countries don’t like where oil is at one bit and they are closing the spigots. It,IMHO,is just a matter of time before demand will out pace supply. Janet
I’m not sure if I like DXO – leverage through ETFs/ETNs can sometimes really make the value decay, or just behave irrationally.
I did buy USO and UNG recently, and will be looking to hold them for a year or two at least.
Thanks for the blogs, keep ’em coming.
Hello Chris:
Same as you I have put some money in DXO. I bought some at 2.75 and will wait for some sort of trend to invest the rest. However I must admit that I am having a hard time figuring out how the returns are calculated with this instrument. The price resets every day. To that end I have also leveraged some money in USO. As a rule of thumb, I generally do not invest in something I do not understand clearly but to me this is the right time to put some money in OIL from a long term investment perspective. Did some research after your first BLOG on DXO and found that most of these instruments (ETN or ETF’s) are complex in the way they track oil.
Maninder
I agree that ETNs and 2x are more dangerous than people realize and they must understand before they buy. The 2x is only advertised to be 2x on a given day. Over time it does not work that way. You also don’t know when you are going to get a dividend because they don’t want to advertise that and cause front running. ETN are time limited, so like an option, you could be right, but not at the right time and it goes away or decays. Compare a 6 month chart of USO/DXO. USO down 70%, DXO down 88%. 1 month USO down 18% DXO down 15%. If not double during down, how could it be double during up trend. There is one point on the 1 month comparison where USO is up 6% but DXO appears down 8%. Too unpredictable.
I like betting on oil, but I must confess am not sure how this DXo is structured. Is it correlated directly to price of oil x2…If oil increase 50% over the next year will DXO go up by 100%…I am not sure it is that simple…
I WANT TO INVEST IN THE PRICE OF OIL GOING UP IN THE LONG RUN (NEXT 3-5 YEARS), WHAT IS THE BEST WAY TO DO THAT…????
I am interested in investing in oil but am nervous about making it a long term investment. I’ve personally seen the negative effects of investing in leveraged funds long term and now try to keep the trades to a few days or shorter. I also recently read about “contango” and how it can negatively affect these Oil ETN/ETFs:
http://www.indexuniverse.com/blog/5362-uso-oil-usl.html
I’m no expert on the subject and am still trying to educate myself but it seems like long term investments in these vehicles can lead to losses or smaller returns even if the spot price of oil is increasing. I would love to hear the other side of the argument, however.
Disclaimer: Please do not invest in ETN’s if you do not understand the inner-workings of the instrument. I will possibly look to prepare a blog post that can explain how they work (DXO in this case) in simplified terms.
Please stick with stocks (simple equities) if you are uncomfortable trading alternate instruments.
Sorry for the confusion I may have caused to some of you – it was not my intention.
-Chris
Chris,
I would advise you to be careful with ETNs.
DXO, I believe, is an obligation of Deutsche Bank
London which means there is counter party risk.
UCO is an ETF that has futures contracts as well as swaps however their swaps are with multiple counterparties. There is enough risk trying to catch a trade in the commodity without having to worry about getting paid if you win.