Oil Price Faces Another 20% Drop Due To Contango Math

Have any of you all looked at USO relative to the CL curve? As in, are the options on USO priced according to the curve or just relative to USO?

I looked at it briefly and it seems to me like they are priced just off the underlying. I know it isn't a perfect relationship, but seems there might be some potential there. Haven't thought of how that could be structured successfully though with USO losing value from the roll cost and everything
 
FCXoptions said:
Have any of you all looked at USO relative to the CL curve? As in, are the options on USO priced according to the curve or just relative to USO?

I looked at it briefly and it seems to me like they are priced just off the underlying. I know it isn't a perfect relationship, but seems there might be some potential there. Haven't thought of how that could be structured successfully though with USO losing value from the roll cost and everything
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This is exactly what i was saying.. How are you to price options on USO given the changing costs associated with the positive and negative slope at the point in which the etf is rolling? how do you model fair value considering that variable?
 
There's some really good historical commentary, widely circulated, on the structure of the USO ETF and the forward roll cost ( and more importantly the arbitrage penalty for rolling said ETF ), and the evolution of the ETF to include the use of OTC Swaps in order to "mask" the roll's footprint.
 
Yes, the spreads tightened today. I made some on Friday expecting them to widen back out when the curve got a little funky. Today I did the same also, but I am sitting on my hands for this afternoon to see how things play out a little more.
 
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FCXoptions said:
Yes, the spreads tightened today. I made some on Friday expecting them to widen back out when the curve got a little funky. Today I did the same also, but I am sitting on my hands for this afternoon to see how things play out a little more.
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My experience has told me how critical position sizing and staying away from the front contracts is.... Heed to my warning...
 
June/Dec was the spread I was trading. But no I understand from following VIX, room for big moves against you in front spreads, but nonetheless less of a move than an outright
 
FCXoptions said:
June/Dec was the spread I was trading. But no I understand from following VIX, room for big moves against you in front spreads, but nonetheless less of a move than an outright
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Trading MZ has huge variance but ya your right relative to the underlying... I think its easy to think to in terms of direction when its a relative value trade.. A so called bull spread can go against you easy in a rising market
 
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