Profiting From Oil’s Continuing Decline

Two of the products, the DB Short Crude Oil ETN (NYSE Arca: SZO) and the DB Crude Oil Double Short ETN (NYSE Arca: DTO) are exchange traded notes and therefore convey credit risk. A fair bit of credit risk considering their issuer is Deutsche Bank. That’s enough to make me edgy, no matter how good the notes’ performance. If the bank goes under—a real concern lately—note holders could be wiped out.

Of the remaining products, one—the ProShares UltraShort Bloomberg Crude Oil ETF (NYSE Arca: SCO)—bestows some useful leverage. Of course, leverage is most useful when the oil market is headed downward. Daily compounding of the inverse oil return can magnify gains and loss. Rebalancing may be required to hold a position for longer periods of time.

You can see how the returns of the SCO fund have diverged from that of spot oil price in the chart below.

Spot WTI crude’s now trading at the $43 level, with a near-term technical objective of $40 per barrel. With SCO’s beta coefficient, it’d be reasonable to expect the ETF to produce a 14 percent gain on such a move. If WTI decisively breaks below the $40 level, though, SCO’s price could advance as much as 26 percent.     

For investors with a bearish outlook on oil, SCO offers an intriguing way to exploit the market’s current downward momentum. Yes, there’s risk, but it’s a lot less than that absorbed in the futures market.

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Disclosure: Brad Zigler pens Wealthmanagement.com's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) option ...

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Chee Hin Teh 3 years ago Member's comment

Many thanks