Need advice for trading crude oil - ETF versus Spread Betting

[sallyjc]

Hi

First time poster so please be gentle! I have lots of questions so here goes.

Background

I'm inexperienced. Bought some shares a few years ago, and have done nothing else, except keep an eye on the markets and read trading websites and the odd book. With crude oil currently below $30/b and IMO set for further falls I'm getting interested in taking a long position at some point. However I'm having trouble deciding on how best to trade crude and would like some advice please to avoid making a wrong move. Trade is perhaps the wrong word as my time frame is long term and I'm happy to hold for a year or two when IMO the oil price will be substantially higher (but who knows).

Getting exposure

I was initially drawn to ETFs within a stocks and shares ISA, however I have concerns about contango. To enable me to better understand the issue can we imagine a scenario in which spot crude rebounds from $30 (my entry) to $60 (my exit) in 12 months. I realise contango is a huge issue in a sideways market but what about my above scenario? I realise it's down to pricing of the outlying futures contracts but just trying to get a feel for it. Also I am assuming the ETF trades the front futures contract before automatically rolling.

Q1. I emailed a provider and asked if I could trade the USL ETF to mitigate contango but the answer was no. Might this be because it is a US fund? Is there a UK equivalent?

On to spread betting and option 1, trading the cash price. Again so I understand the mechanics, assume an entry/exit of $30/$60 and a position size of £10pp. Profit would be £10 x 100 x 30 = £60k - overnight charges. Rough calculation of overnight charges is £900 p.a.

Q2. At face value I am guessing £59k profit will be much higher than if I took the ETF route? I understand spread betting firms will play all sorts of tricks and the re-opening and closing prices may not be favourable etc, and £59k is massively unrealistic etc. However I'm only plucking numbers out of the air to help me understand the mechanics and make comparisons. And my account will be funded so as to avoid margin call when oil price = 1p a barrel! No more caveats

Moving on to spread betting option 2, the underlying futures. It seems all the firms offer this and most popular seems to be the rolling monthly which benefits from no overnight charges.

Q3. I assume the spread is wider for monthly expiries? Over 12 months, and all things being equal/linear etc. Would this route be preferable to trading the cash which attracts the £1k financing charge?

Also am I correct in thinking contango wouldn't be a major issue provided I maintain the £10pp? My understanding with the ETF is the initial stake buys you fewer and fewer barrels as the oil price climbs? And if the price trades sideways you are eroding your stake and not your stake + profit?

Final spread betting option 3, trading underlying futures but not the front month, but 3 months or 6 months out.

Q4. I assume an even bigger spread applies to cover the absent overnight charges, but long term what's a few cents between friends? In this scenario are you also making a prediction when you will exit? With the rolling cash spread bet I would be happy to hold for another 12 months and just pay another £1k financing. I would be rolling over the 3/6 month contract but again just seeking some guidance as to best route to take!

Thanks for reading and for any help you can give me!

Best wishes

Sally

 

[options-george]

Sally,
you have posted some really good questions here, so have obviously thought about this quite a lot already.

I trade Oil using CFD's but only intraday, so unfortunately I don't have any answers for you.

However one other possibility you could consider is to buy options on Oil. Options should be available on the CL futures contract (check Interactive Brokers) and also on oil-related ETF's. Again, I don't many details on these, but it's one avenue you had not mentioned above. The only financing charge you would incur with the options is the time decay aspect.

Good luck, and well done on all the research you have already done!

 

[sallyjc]

Thanks for the suggestion. I recall reading an Options book once which resulted in a lot of head scratching. Perhaps I should take another look as the limited downside risk is a massive plus.

 

[gilesgold]

Same for me!

Hi Sally, just to say that I'm in the same boat as you, (also as a relative beginner), and I'm asking EXACTLY the same questions.. e.g. Daily Bets vs Monthly Bets vs Options vs Futures vs ETF's.. Its tricky to make the call, particularly with the added complication of contango, right?

I did come across an article regarding contango and ETF's, which you've probably seen already, which recommended trading the USL ETF in a contango market (if ETF is the choice). You can trade this using a spread betting platform such as IG, who do offer it, although I've no idea what the best value is.

My sense is that, having asked a few people, you've got to be pretty sharp on the old arithmetic, and possibly quite deep in the respective industries, to make sense of what constitutes the best deal on any of these. I did ask a respected senior v experienced commodities trader, and even he was a little bamboozled. (although his recommendation if you can do it in a ISA wrapper is to trade an ETF because its simply less stressful than on an Spread Platform- I told him I had to stick with the spread companies for tax reasons). If you get any more joy, or reach a conclusion of sorts, do post here!

 

[NVP]

keep it simple in trading - if you don't understand stuff don't trade the market or the methodology to trade it ........optionsare are for specialists...........don't gradulate until you understand basic buying and selling principles and are successful at that ....there are no shortcuts

N

 

[timetotrade simon]

As with all things .. you have to actually make the profit first.

There is no way around the contago effect otherwise people would buy the front month ..sell a back month and just roll the front month on each expiry.

Buying a spread betting rolling bet in Oil is one way of opening the position BUT this costs over 3 cents a day (as the spread betting company must counter the contango AND will charge a financing fee for maintaining the position). Six months would cost you over 550 cents.

If you really intend to maintain a six month position the best way with a spread betting company is to open the front month and then tell them that you wish to roll the contract on expiry into the next month until further notice. You will pay the contango (of course) and a bit of extra spread but much less than if you try to trade in and out yourself. Spread betting companies tend not to offer anything other than the front month until the next contract is almost due to go live.

The six month forward contract (sep) is almost 4 dollars above the current front month (Apr). If you add in 6 cents for each roll (6x6 = 36) you will need to be targeting a price nearly 450 cents above current levels.

ETFs can be good investment instruments but they are expensive and tend not to move as extravagantly as the underlying instrument. They are also a bit more opaque. They are also safer.

 

[peakoil]

Hi Op, methinks you might want to take a little peek (or perhaps a further peek) at a certain futures bet with IG known as the "ETFS Daily Leveraged WTI Crude Oil" bet. Current furthest available far month is the September contract which expires on 20th September 2016. And please consider this - If September isn't far enough for you, you can have it (or indeed the great majority of your bets) automatically rollover onto the next contract.

HTH

 

[trademarketedge]

Hi guys,

I want to chip in because I believe I can help. I know I am late but just found this thread.
First, tell you that if you believe oil is going to go up it is because inventories will come down (be it demand up or supply down), which in turn would lower storage at Cushing, Oklahoma. This would lower contango in the futures curve and it would be "cheaper" to rollover contracts. With a target of $60 in 12 months, you have to calculate what do you think the average rollover cost will be. Right now it is about a 2% monthly for the front month futures. However, if situation keeps improving this will get lower so you need to calculate an average prediction.
I would never recommend buying the front month. Rollover costs get increasingly cheaper as you move further out. For example, the roll for June 2016 (closest month) is about 2.5% but for October is only 1%. Now September has a bit more oil beta, meaning it moves the most up/down. Yet the difference with say September is low in beta terms.
Now real solution comes from getting paid the rollover cost from the front month and get long double the contracts in the month with the best rollover/beta ratio.
Another solution is to buy Gasoline since it usually has lower rollover costs or buy XOP ETF (exploration&production).
Also, you have to take into account that you may be wrong and oil just moves to 45-50 and goes back down (contango would increase) and then in 6 months you are down 40%. Like I said the best thing is to do an unbalanced calendar spread (rollover costs could be 0) or buying a different product all together.

 

[peakoil]

In fairness, those of us who were long the Sep bet from February onwards didn't do too badly. *Until* and I must stress *until* just before this weekend (see below) the far end ETFS daily Leveraged WTI bet was IMO 'not a bad way' to take a long position in oil...

I said "until" (& with no disrespect to the last poster's views above) because there is quite another matter of interest, with regard to spreadbetting the ETFS daily leveraged WTI Crude Oil Contract, and it's this.

IG have very recently & substantially changed the way the ETFS Daily Leveraged WTI Oil Bet is quoted. Shortly before this weekend you could go one pound a point at around the then 25 level on the Far out December contract and you would put up margin of approximately £2 per point, for each point you held in same.

Well... now that it's the 16th of May, and without any fore-notice, the Dec ETFS daily leveraged crude oil bet is quoted on the IG platform as being up around 104% today this very day, and what's more, now the minimum contract size is showing £1 per point at not the usual £2ish per point, but £500+ (!!!) per point, coupled with a spread which shouts aloud"if you want to trade me, from today, it'll be more than expensive".

Right now, I'm left wondering why there was no email in advance about this?

Alternatively, if anyone with knowledge can fill us in on what's going on, it would be appreciated. I might add that I spoke to someone at IG a little earlier, and in all fairness I still do believe there should be others with plenty more to say on same.