Trading Oil via options

"Your info is wrong. USO tracks CL very close, even long term as the 1 year charts show."

ok for all of the non quants out there let's have a brief lesson in correlation. CL and USO could be 100% correlated and NOT move the same amount. for example, if every single day CL and USO moved in the same direction they would be 100% correlated but what if CL moved 100 bps every day and USO only moved 1 bp?
 
Quote from Thous@nd-lot-Trader:

Hi,


The options on the CL Future are "quite wide", but have longer trading hours, whereas the USO Options on the ETF quote "quite tight".
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wide? they are a few pennies wide and you can usually middle it. what strike do you want and I will post a better price for you to hit
 
Quote from diaoptions:

So how does "contango" affect these two trades? They look the same to me using rough quotes.
  • July 2011 Buy CL @ $102.00
  • July 2012 Sell CL @ $87.00
  • Minus 14.7%
  • July 2011 Buy USO @ $38.00
  • July 2012 Sell USO @ $33.00
  • Minus 13.2%


:)
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You clearly misunderstand futures markets.
 
CL Futures options (LO) are fine and you are trading oil. The spread order book works well and the pricing and hedging are straightforward. USO, UNG, VXX and assorted commodity ETFs are junk and i would rather pay full spread if necessary on the fops than get stiffed by not being able to tell what price the underlying should be.
 
my little bit of research on on the rollover cost of these short-term futures-based ETF's has been very inconclusive. I start to really dig into the vixy.. I have a client that has sold options on the vixy for a while and seen a consistent return. He claims that the volatility of volatility is so high it makes up for the rollover costs on his 2 to 3 month trades. I have a trade right now on it. I know that sometimes through backwardation there can be a positive cost of carry on some of these ETF's. I'm not sure if these losses are showing up in the options pricing. But I guarantee you the market makers have the math solidly worked out in your head. And I'm sure the public is paying a hefty premium for these instruments. The bottom line is you're speculating more in the degree of contango or backwardation than realized. I have seen some posts that extrapolate some of the math in a very scary way. But the thing is the difference between the futures contracts in the spot price never stays the same. And this my friends I would like to know a lot more about haha..
 
USO and USL are simply not the same thing. USO is a diverse holding of futures including gasoline and natural gas. USL is a much more focused holding of futures:

USO:
The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil.

Top 10 Holdings (43.33% of Total Assets)
Company........................................% Assets
Morgan Stanley Inst Liquidity Gov Ins.....17.68
Goldman Sachs FS Government Sel..........12.06
Future Contract On Wti Crude Future....... 8.22
Fidelity Instl MM Fds Government..............5.37

USL:
The investment seeks to replicate the changes in percentage terms of the price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the average of the prices of 12 futures contracts on crude oil traded on the NYMEX. The fund will consist of the near month contract to expire and the contracts for the following eleven months, for a total of 12 consecutive month's contracts. When calculating the daily movement of the average price of the 12 contracts each contract month will be equally weighted

Top 10 Holdings (66.11% of Total Assets)
Company.................................................... % Assets
Morgan Stanley Inst Liquidity Gov Ins.............. 19.05
Fidelity Instl MM Fds Government I.................. 12.64
Future Contract On Wti Crude Future Jul12........ 4.31
Future Contract On Wti Crude Future Feb13...... 4.30
Future Contract On Wti Crude Future Jan13....... 4.30
Future Contract On Wti Crude Future Nov12...... 4.30
Future Contract On Wti Crude Future May13...... 4.30
Future Contract On Wti Crude Future Oct12....... 4.29
Future Contract On Wti Crude Future Sep12...... 4.29

Nor is contango some sort of crime:

http://en.wikipedia.org/wiki/Contango

"A contango is normal for a non-perishable commodity that has a cost of carry."

USO and USL are both intended to be held for short periods of time and for short periods of time they behave very closely:

http://finance.yahoo.com/q/bc?s=USO&t=5d&l=off&z=l&q=l&c=usl

The fact that they behave so closely for periods up to a year is actually surprising to me:

http://finance.yahoo.com/q/bc?s=USO&t=1y&l=off&z=l&q=l&c=usl

For longer times they will, not surprisingly, diverge:

http://finance.yahoo.com/q/bc?s=USO&t=2y&l=off&z=l&q=l&c=usl


They and a number of other ETF's are meant to provide traders who normally trade stocks and stock options commodity exposure. I find them useful and have used them and their options when appropriate. Their lack of correlation with the S&P 500 can present opportunities for unique trades.

http://finance.yahoo.com/q/bc?t=1y&s=USO&l=on&z=l&q=l&c=USL&ql=1&c=^GSPC


:-)
 
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