If We’re Wrong: Keeping DUG From Putting You In A Hole

In a recent post by David Pinsen, (“Crude Strategy“), I mentioned a hedged bet on the ProShares UltraShort Oil ETF (DUG):

In Case We’re Wrong About DUG

One of Portfolio Armor‘s (top ten names on Thursday was the ProShares UltraShort Oil & Gas ETF (DUG). The system picked it based on the same quantitative analysis of past returns and forward-looking options sentiment it applies to every stock and ETF, but if you want a story behind that pick, it’s pretty simple:

  • You’re not doing a lot of driving now, because we’re all basically under house arrest due to certain people eating bat soup.
  • The Saudis have opened up the spigots to punish the Russians for not sticking to OPEC quotas.
  • Some analysts are calling for $5 per barrel oil, or even negative oil prices regionally.

The challenge here is that DUG is highly levered and can blow you up if you end up being wrong. A solution to that is to buy DUG and hedge it with an optimal, or least-expensive collar.

Bridgewater's $14 Billion Bet Against European Stocks

It occurred to me that we’ve been here before: Portfolio Armor picked DUG during another market decline, albeit one much less serious than this one. In that case, it ended being wrong about the Proshares Ultrashort Oil ETF DUG. Let’s look at what the consequences of that were.


Betting Against Oil In Late 2018

Readers may recall the market swoon of December 2018, but if you don’t, the chart of the SPDR S&P 500 ETF (SPY) below may refresh your memory.

Proshares Ultrashort Oil

At the time, it wasn’t clear if we were heading into a bear market and a recession or not: we were at an inflection point where it looked like it could go either way.

In that context, this is the hedged portfolio Portfolio Armor presented to an investor who indicated he had $30,000 to put to work but wanted to strictly limit his downside risk to a decline of no more than 13% over the next 6 months:

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Disclosure: No positions.

Disclaimer: This article is not an investment recommendation, Please see our ...

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