Inverse Oil ETF Plunges 26%: What Gives?

This article has 20 comments:

•  
  rodcore

  Apr 09 04:28 PM
  Yes, we should all know what we are investing in. I learned that lesson today when I was forced to blow out the position at a 35% loss.
•  
  zenalgorithm

  Apr 09 06:33 PM
  I need to open up one of these ETFs. Easy money, once you put your escape clauses in the prospectus.
  
  Legalized Ponzi scheme.
•  
  fgjsfd;g

  Apr 09 07:12 PM
  rodcore, Why on EARTH were you long something that was +100% premium over NAV? This truly boggles my mind.
•  
  cromag

  Apr 09 10:03 PM
  Wow! yes rodcore, one of the many things you need to research, first check all ETF's on ETFconnect for the premium/discount and that the total asset value is substantial enough. Here's the link
  www.etfconnect.com/sel...
  
  
•  
  cromag

  Apr 09 10:04 PM
  By the way... can this happen to ProShares QID and SRS or SKF?? !!
•  
  Muzie

  Apr 09 11:16 PM
  Cromag: I don't know why don't you get up, read your prospectus and find out.
•  
  tclwrap

  Apr 09 11:34 PM
  I think this 3 consecutive day story is hard to digest.
  
  biz.yahoo.com/e/080228...
  
  according to the above, UCR and DCR exist together as one entity.
  If DCR seizes to exist, what happens to UCR then?
  
  Is there any clause on UCR, if OIL stays below 90 for 3 consecutive days?
  
  What an ETF this was! I hope no clauses exist in this thing.
  
•  
  Mose

  Apr 09 11:50 PM
  Oil has to stay below 9 not 90 for 3 days. Check your sig figs
•  
  tclwrap

  Apr 09 11:57 PM
  Mose, my point is if such a clause exists or not? Never mind the 90 figure.
  
  From what I understand now, reading more blogs, if DCR seizes to exist so would UCR. The clause of 111 oil for 3 consecutive days only applies to DCR.
  Do shareholders of UCR know about this?
  
•  
  Mose

  Apr 10 12:23 AM
  It is the same for UCR. If one exists then so does the other.
  
  Once the termination is hit the two will keep trading until June 25th. The settle for front month, july by then, will be the final NAV price. Based on that price each DCR shareholder will get (120-Price of Oil)/3 and UCR will get (Price of Oil)/3. If Oil is above 120 then each UCR gets 40 and each DCR gets nothing. The UCR prospectus has the same termination clause that the DCR has as well
•  
  Mose

  Apr 10 12:24 AM
  There is still a good arbitrage opportunity available. Short DCR, Long UCR and hedge by shorting an equivalent amount of USO or OIL. Don't forget calls for oil at 120 so you don't lose your shirt when it goes above 120!
•  
  tclwrap

  Apr 10 12:37 AM
  thanks Mose! Great information.
  
  Even if we hit 3 consecutive days of 111, chances are OIL would pull back from here till june. Still OK for me if I get (120-100)/3, better yet if OIL closes at 90!
  
  If DCR moves to 10, I am selling and saying farewell.
  
  I don't do options, never have. However, I could consider buying some UCR to hedge against DCR. Righjt now, I have set some stops.
  
  thanks again!
  
•  
  maher

  Apr 10 02:41 AM
  Mose - I don't get it. I went long on DCR when it was above $10; so I am in the House of Pain. What happens if oil price stays over $111 for more days? I get some sort of a handout 120/3? What?!
  
  Please advise!
  
•  
  maher

  Apr 10 02:56 AM
  Wait, do you mean then that if oil is at $120 on June 25th; DCR will be at -0- (Zero)? And UCR at $40?
  
  And if oil goes continues to go above $120, then DCR will continue to be at -0- (Zero); and UCR will climb according to (Price of Oil)/3?
  
  But once oil hits $120 and DCR goes to -0- Zero, could it again rise from -0- Zero if oil drops back below $120?
  
  That will mean for DCR to be at $10 again, the price of oil has to drop to $90; and for DCR to be at $14 again, the price of oil has to drop further to $78 per barrel.
  
  Meaning DCR will automatically cease to exist at oil $120, until such time as oil starts falling back below $120.
  
  Geesh, this is complicated, and it sucks!
•  
  XelaR

  Apr 10 06:05 AM
  Thanks from me too, Mose. You only need the 120 calls if you think crude will spike suddenly: if it goes up slowly, the trigger event occurs and all you need to worry about is the price of crude falling until the distribution date: you can buy back the USOs as soon as the event is triggered. Then you buy puts on USO to protect your gains.
•  
  etfwanderer

  Apr 10 10:03 AM

  My Website
  good article ... thanks for bring it to the attention. always found the UCR and DCR combination to be the wierdest and erroneous ETFs. good that I stayed away.
•  
  SONIC

  Apr 10 10:14 AM
  Everyone seems to be looking at UCR / DCR from a wrong perspective. The pricing, including the steep premiums and discounts make perfect sense when you look at it this way:
  
  - When you buy UCR, you are effectively buying 1/3 barrel of OIL at the nearest future month price PLUS you have written a far future PUT option on NYMEX OIL at a strike-price of $120. UCR can never go over $40 / share. There is effectively a colar there. In order for someone to buy UCR with that collar, they must get a discount vs. without the collar. Hence the discount, which increases as the shares approach $40.
  - When you buy DCR, you are effectively buying a long-term put on NYMEX with a strike price of $120. The premium you pay is the time-value of that put option. Even, with a NAV of zero for DCR, you still have the put option, which then becomes on-the-money or out-of-the-money. There is still a premium.
  - BUT, because of the liquidation rule, if oil closes for 3 days above $111, the put goes from being very long term to short-term, but there's still significant value. With OIL at $120 / barrel, how much would you pay for an option to sell at $120. If oil goes to $102 within the expiration (a few weeks), you'll now be $20 in the money, and your NAV will be $6; if oil goes to $90, your NAV will be $10. If you're short-term bearish on OIL, that's worth a few bucks. The premium will decay to zero as the final liquidation approaches.
  
  I hope this clarifies a few things. I'd like to better understand the affect on the premium as we approach or pass the strike price, if anyone has any insight. All I know is, it is not zero, even if OIL goes to $125.
•  
  tclwrap

  Apr 10 09:11 PM
  Mose, I mention I set my stops earlier... well, I got booted this morning, was probably first to go. I am done with MACROSHARES now, never trade them again... they don't plan to be around long so they simply are bad investments.
  
•  
  paultaut

  Apr 10 10:29 PM
  what do the "analysts" who point to further commodity moves to the DOWNside have to say about continued pressure to the UPSIDE? Or are they just going to keep raising the bar and extending their timelines to accommodate themselves....
  
  
  The only way Half of the world which is currently engaged in the early stages of Industrialization can continue to grow without pushing ALL commodity prices up......Is for the other half to start using less...Prolonged Muptiple Recessions for all Developed nations...Malthusian Theory has finally found a home.
•  
  ACEMAN

  Apr 11 12:07 AM

  My Website
  Y'all don't know a darn thing about inverse ETF's. When it comes to commodities, for example, check out Diapason of Switzerland and find out how a commodity or a currency ETF is truly constructed without any monkey business in the fine print. Don't speculate, don't hope against hope, just use your G-d given brains!