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    • Thu Apr 10th 10:14 AM
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      Inverse Oil ETF Plunges 26%: What Gives?
      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.
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