The Justinian

In recent articles I’ve discussed the two primary options for trading the price of oil directly. One is oil futures, and the other the oil ETF (exchange traded fund, symbol USO). I recently became aware of another option, which is as close as a private investor can get to trading spot oil, to my knowledge.

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One pound gets two dollars?  Almost. Just before 8AM EST this morning the British pound reached 1.9917 dollars.  This makes it the highest it’s seen since 1992, and is very close ( about 200 pips or two pennies away) to a 26 year high from back in 1982!  Numbers have been strong out of the United Kingdom with both housing and GDP numbers beating expectations.  The surprise rate hike from the Bank of England was also a key element for traders with the suddenness showing signs of further rate hikes.

Take a look at this article on Bloomberg:

“By responding early to changes in the inflation outlook, the monetary policy committee ultimately needs to raise interest rates by less than would be the case if we delayed,'’ he said. “Future action will depend upon how those risks to the inflation outlook materialize.”

If you read my article on trading oil futures, you know that trading oil can be very expensive if you’re on the wrong side of the trade in terms of the carry charge. Another option worth exploring is the oil ETF, short for exchange traded fund. For a general explanation of the term exchange traded fund, click here.

ETFs, in essence, attempt to mimick the performance of oil futures. The only one I’m aware of, and one which I’ve traded from time to time, has the symbol USO, and is called US Oil Fund. It launched in early April, 2006, and has since steadily declined. Not only was it launched near the peak in the price of oil, but it faces a structural problem that has caused it to decline even more than the near-month oil futures price over the same period of time.

For the details on why the price declines over time, read my in-depth piece on oil futures. Suffice it to say, that unless oil stops bidding for storage, the cost of buying oil months and years out will continue to be much higher than the current price. This means holding a long position in USO is too expensive to be worthwhile. If you were of the mind that oil is going to drop, however, you’d have the carry cost working in your favor.

A friend sent me over an article. If you work on Wall Street, have aspirations to work on Wall Street, or even if you just work, you should read it.

I’m going to get a bit technical here, so please pardon me.

However it’s well worth it if you’ve ever invested in an instrument related to the price of oil, or if you look to in the future. There are far too many ways to invest in oil, and some of them are not worth your trouble. I’ll try to clarify here, but feel free to submit comments if you need f
urther clarification.

Oil Futures
Oil futures have at certain times been one of the best ways to take long positions on oil, betting that its price will rise. In the past, the outer months of oil were priced below the near months. This is technically called backwardation. Assume, for example, that you want to invest in oil, and hold it for one year on January 1st. Also assume that futures are trading at these prices currently for each month of expiration:

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I read an article recently in the Wall Street Journal about a guy who shook the sports betting market when his picks were released. This article mentions the size of the sports betting volume rivaling the GDP of New Zealand. It’s no wonder why the United States would want to keep this money in the country. The conclusion many are drawing is that the US government outlawed online gambling to give the ‘brick and mortar casinos’ in Nevada some time to catch up to the online arena that took off so fast. But there’s something more interesting. Continue Reading »

You know a market is big when something as widely used as mortgages are playing it too. HSBC has a mortgage that lets you pay in different currencies. It looks like it’s only for UK residents currently, as there is probably much more demand than the United States or mainland Europe.

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Everyone talks about the smart money and the dumb money. These terms tend to be a bit silly if only because they require circular definitions. Smart money is “smart” because it makes money, but if it stops making money, it becomes dumb money. The terms, however, imply that those making money rarely lose money, which is not the case. More accurate definitions, then, should encompass the players involved. Banks, pension funds, most mutual funds, and large hedge funds make up the smart money, so-called because over the long run their strategies have been profitable. Retail investors, day traders, and highly speculative hedge and mutual funds are what I’d call dumb money, because while they might be wildly profitable in the short term, their long-term profits are far from assured.

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After hitting the top of the range for the fourth time and turning around, the USD/CAD looked as though it would make the round back to the bottom again.  But that would have been too easy right?  So instead it drops over 100 pips yesterday only to come back and close only down 40, and then today rally another 80 pips.  Being long for a while now, I hoped it would was going to break out of the range last time it was at the top, but I guess that would have been too easy too.  Keep an eye on it this time.

After bouncing off three times the GBP/CHF pushes up to a level that it hasn’t been above since 2002.  Coming back down?   Propriety trader Mihai Nichisoiu has an interesting view:

It has been my belief since long that most volatility blowouts are triggered during periods of rather low market liquidity (i.e. they may be a result of liquidity gaps), and hence - contrary to the popular conception - these events may not be characteristic to a large-scale, public participation. Then, I think the ‘public’ participates only in the much later stages of a volatility blowout, upon a late acknowledgment of the event, and most times at awfully disadvantageous rates of reward / risk.