Sunday, December 07, 2008

DXO - a 2 x Ultra Crude Oil ETF

I received this question regarding my last article:

Looking at the daily chart it looks like that price you bought at is near to a 1.272 extension at 2.57 the 1618 is at 2.18. Buy more ?


First the answer: Yes I intend to buy more DXO. As written all ETF positions have a target of 1000 shares initially. I just decided to scale into these positions as otherwise the daily movement will affect my daytrading as long as I have no segregate account for these swing holdings. In addition I don't see an up- and away type of market, but further consolidation in huge ranges before the market will be able to take off again. Too much damage has been inflicted in too short a time.
While the UYG position has options available so I get paid for my willingness to build a position, the DXO has a different rationale.

Looking at the above chart, short is the only way to go and where DXO a regular share I would go short and stay short until the company filed for chapter 11.

But DXO is no regular company, it mirrors the development in the Crude Oil market. And it is supposed to make a daily percentage move twice as big as the crude oil market is doing.

Will Crude Oil go to zero? A limited resource the whole world depends on. You really believe that then go ahead and short DXO.

Crude Oil is a limited resource and the moment the economy starts going again, we will see new highs in oil. It's just inevitable. I don't care if it's in 6 months or 3 years or 10 years, oil will go up again unless someone discovers a way to make oil from saltwater. But why would someone do that? With oil below 40$ in the short term? It makes no economic sense whatsoever!

Right now there is no reason at all to invest in oil or the oil industry. And the moment we need oil again, the world will find, that -what a surprise- there is not enough oil to bolster the economic upturn.
As I said, I don't know when it will happen, but I'm quite sure it will happen.

Friday the first call was made for oil below 25$ remember what happened, when the oil 200$ calls were made? It wasn't long after these, that the market started to break down.
Surprise.. it were the big investment houses, who made these calls. And who was on the other side, if you believed that oil 200$ call and went long?
Who is on the other side, if you go short oil now? I won't bother you with the answer, but I bet you that even if Goldman is now a regular bank, they still have an inhouse department going against the mainstream. And that department might save the day in one or two years when their oil profits will pay for all the losses made in other departments.

DXO at 2.50 has a very limited downside. Sure it takes a while to go up again, sure Ultra ETF's fall faster than they rise as a 25% move down from 5$ brings it to 3.75$, while a 25% move up again from that level brings you to 4.68$ and not 5$.

So what! If oil goes really down to 25$, then I will have added to DXO at 2.25$, 2.00$, 1.75$, 1.50$, 1.25$ and 1.00$.

  Shares DXO Price Total
  200 2.59 518.00$
  200 2.25 450.00$
  200 2.00 400.00$
  200 1.75 350.00$
  200 1.50 300.00$
  200 1.25 250.00$
  200 1.00 200.00$
Total 1400 1.76 2468.00$

When oil is down to 25$ I will be down about 1500$ in my position as it will be worth about 900$ total. Should this happen I will still sleep sound as the size of the position will not affect my trading. My risk is really limited and to tell the truth I actually would like to see oil at 25$ to build that position. I have a bigger problem, if oil starts to rally now and I add to my position in a rising market only to see it come back down in spring and retest the lows made now.