Does The United States Oil ETF (USO) decay?

Since there is a lot of talk about oil lately, I thought I would do a piece on The United States Oil ETF (USO).

Recently this question was raised on StockTwits: Does USO decay?

If you have read my articles on volatility then you should be familiar with contango and backwardation. Commodity futures face the same types of futures curves, albeit more stable. Let's compare some prices charts to answer that question:

Here is the USO 1 year chart:

Here is the USO 5 year chart:

It is important to note that the spot crude price is a little behind on the first chart. 

If you take the difference between the spot price of crude and the performance of USO, it averages out to about 3% per year. The management fee in USO is 0.45% per year. 

Finally lets look at the max chart, USO began trading in April of 2006.

You don't have to be a rocket scientist to see that there is a divergence here. 

When using USO it would be best to plan this price decay into your investment objective. 

Outlook for oil

Many factors are currently at play here. China is building its reserves. U.S. drivers are driving more thanks to lower prices at the pump. Overall fuel economy continues to improve. Iran may now be able to sell their excess capacity on the open market. OPEC announced today that they don't expect production cuts.

With so much negative news, and very few positives, one might take a contrarian view here. It is my belief that someone is going to blink. We may experience more short-term pain before that happens. Ultimately capex spending will catch up to the supply side, which usually takes around six months. 

Before long we will begin to see supply level out and stability return to pricing. Oil companies can not run non-profits forever. Issuing large amounts of debts to pay dividends, not turning profits, and slashing capex spending will eventually weigh on supply. Most of the excess supply, in my opinion, is from everyone pumping to keep their heads above water. Once companies start to go under, expect consolidation. Consolidation leads to less competition, which in turn will lead to higher prices. The middle east relies on oil to fund social programs, and in the case of Saudi Arabia, massive programs. They are sitting on a pile of cash reserves. However, much of their budget is now being funded by reserves, that can't happen forever. Eventually a small pullback in production for a larger move in prices will make financial sense.  

The US Dollar is also a large part of this equation. A stronger dollar puts pressure on oil. The potential for raising of US interests rates is causing upward pressure on the dollar. An improving global economy could even out this effect. 

When will all this happen? That's the golden question. 

Just remember your holding costs when investing in any commodity fund, such as USO.

Best of luck!

The Current Volatility Situation and A Look Ahead

Hello everyone, I hope you have been doing well. We have seen many ups and downs with volatility over the last month. Here is a snapshot of the VIX Index.

In late June we saw the Greek drama unfold and present a very favorable shorting opportunity in the VIX. I initiated a position and exited when the VIX fell below 14. I did not expect that the VIX would touch 12. Better to be safe than sorry. It still proved to be a very profitable trade for me and I am happy with the results.

Greece still remains a wildcard for the future. I don't believe for a minute that they will be able to pay back the loan, given current conditions. I also don't know how they are going to jump start their economy without providing some sort of stimulus. Time will tell but for now Germany owns Greece.

Current Conditions

As you know, if you have followed me for any length of time, I am only looking to short volatility. Conditions remain too calm for this to have the proper reward to risk ratio for me. My advice would be as follows:

SVXY/XIV: Create some sort of stop loss or profit targets to exit your position.
UVXY/VXX: Avoid shorting as the choppiness in the VIX, and its current low position, make this rather risky. I always avoid long positions in these two.

Coming Up

Looking forward, I continue to predict increasing volatility for the remainder of 2015 and into 2016. Yellen has mentioned many times that it is the pace of rate increases, not the start that we should be concerned with. This leads me to believe that The Fed still finds September an appropriate time to increase rates.

We have some camps out there that believe The Fed will never increase rates. I don't know if I believe that but low rates could persist if economic conditions worsen. Economic data is currently mixed and skewed towards the positive side.

China should remain on your radar due to the spillover effects. People have been talking about the Chinese slowdown for years. By slowdown I am also talking about a crash or severe correction in their stock market. Is it finally happening? We will see. If it does happen, this will have a profound impact on the U.S. market. The global economy is now more interconnected than ever. One must be aware of the possible effects here at home.

This Blog

I received a comment on StockTwits that I should post daily updates on my blog. I think I should clarify why this blog was created. This is to supplement my SeekingAlpha library. Options strategies, general news, personal finance, and really anything else I want to write about will come here.

I am a school teacher and take my job and students seriously. During the school year it may be months before I post a new article or update this blog.

I believe in quality over quantity. If I updated this blog daily or posted daily I would essentially be no better than CNBC or any channel you tune in for financial news. It would be the latest headlines and nothing more. I think your time is more valuable than that and you are smart enough to know what is happening in the world on your own.

I make, on average, 2-5 trades in volatility per year. I have outlined the conditions that I look for in numerous SeekingAlpha articles. If you are watching the day to day swings in the market we have different trading styles and my writing just simply may not be for you.


The BEST thing to do would be to subscribe to this blog by email. Over the next few months, especially with the start of the new school year, I may publish 2-3 posts per month. These posts will be highly informative and filled with only what you need to know. No fluff, no daily news, just straight talk about what matters and when it matters. If an opportunity in the VIX presents itself, you can bet on me letting you know about it.

As always I appreciate you reading and I wish you a profitable end to 2015!

Welcome to Volatility Fantasyland

In this post I wanted to clear up some common misconceptions about investing in products such as UVXY and VXX. In addition to misconceptions we will review some general examples of what not to do.

For the basis of discussion we are going to use StockTwits posts from the last several days. I am leaving out the author's name and picture.


1. I'm going to buy on the dip.

Great advice, if this were a profitable company you were looking to own over the long-term. When looking at the long-term chart of UVXY I really don't see an opportunity to buy the dip.

2. Suffering

It looks like he originally bought the dip, but forgot about time value decay. I think he gets the point now.



3. Panicking 

Brave enough to ask for help and wise enough to realize she made a mistake.



4. Oversold

Again, just like the buy the dip philosophy this doesn't apply all of the time in the world of volatility. Especially with contango sitting at 13%.


5. Just believe 

No one cares about your beliefs and volatility trading should take advantage of the errant emotions of others, not yourself.



Conclusion

Yes, there are times when UVXY and VXX can produce amazing results. Check out this article that backtests their performance from 2008 and 2011. Both of those events had one thing in common, recessionary realities and fears. We are nowhere near clear signs of an approaching recession. The only way you are going to make money off of UVXY and VXX right now are through geopolitical risks. If you have noticed, those risks have subsided drastically the last few weeks. Disasters are unpredictable but serve as another opportunity to profit. However, unless you have a crystal ball I would stick to the strategy of shorting these vehicles after a spike in the VIX.

Hopefully you are sitting on healthy profits from the last few weeks, I know I am. Patience until the next event my friends. If you have money that you don't need and are looking to gamble, be my guest, it's a free country. Just know your risks and be ok with losing half your bet.

We need people that make poor decisions like above. They provide us with the liquidity to short these instruments. However, I won't sit back and let my readers make the same mistakes. I have been saying the same thing ever since I have started writing on volatility. Stop chasing the boulder up a hill, wait for it to start to rolling back down and then run behind it.



Thanks for reading and I hope you have a great weekend!

UVXY Call Spread

In this post we will take a look at an example UVXY call spread. We will take a look at a winning and losing trade. The key to profiting from movements in the VIX is timing. Please take a look at my SeekingAlpha articles on contango and backwardation for more information on how I like to time movements in the VIX futures.

The timing of call spreads in UVXY is key. If you do not understand VIX futures and how UVXY operates I have a library of educational articles listed on my SeekingAlpha page. 

The call spread strategy is a way to profit from UVXY falling while protecting yourself if things don't go as planned.


We are going to focus on two calls:

First the Jan 15 - 2016 $40 Call

Chart courtesy of Optionshouse.com

Second the Jan 15 - 2016 $80 Call

Chart courtesy of Optionshosue.com


I like to use options that still have a little time until expiration. You may also use this strategy on options that are much closer to expiration.


Losing Trade

The only reason you would lose with this trade is if you executed the strategy to early while the VIX was low and also sold early.

See below:

Initiate trade June 24th

Sold 1 $40 call at $8.50
Bought 1 $80 call at $4.40

Net credit of $410 less commissions.

Closed out trade early on July 8th

Bought 1 $40 call at $20.78
Sold 1 $80 call at $11.00

Result

$40 call: Loss of $1,228
$80 call: Profit of $660

Total: Loss of $568


Winning Trade

Again, as far as timing goes, I recommend reviewing my contango and backwardation strategy listed on SeekingAlpha.

Initiate trade on July 6th (not perfect timing but you thought this would be a good time to short the VIX)

Sold 1 $40 call at $19.40
Bought 1 $80 call at $11.00

Closed out trade on July 14th

Bought 1 $40 call at $8.85
Sold 1 $80 call at $4.80

Result

$40 call: Profit $1,055
$80 call: Loss $620

Total: Profit $435



This strategy is better than selling naked calls because you eliminate the unlimited loss potential and manage your risk. Yes, you do lose some of the reward, but one shouldn't be greedy when trading volatility.


Thank you for reading and have a profitable week!

The Greek Drama Continues On With Earnings On Deck

All of last week the focus was on Greece and China.

For now, it appears the nosedive in Chinese markets is over. However, I would expect a lot of volatility in that market over the next three months. Going forward, hopefully the Chinese market will begin to trade on fundamentals. Everyone keeps commenting on the slowing growth in China. Let's face it, 7% growth doesn't last forever. Going from 7% to 6% really isn't the end of the world.

The Chinese economy is complex and government policy will continue to dictate its future.

I personally don't invest in the Chinese market so my only concern is a crash in their markets affecting the U.S. markets.

Greece

If you have been watching the news this weekend the Eurozone and Greece are still in talks and negotiations on a deal. The current U.S. futures are down about 0.5%.

A complete Greek exit seems to be off the table. This event would have had the most negative effect on U.S. markets.

There is talk of a temporary Greek exit. I don't understand exactly how that would work as talks have not yet ended.

Volatility

As this all plays out, I still expect a peaceful resolution to the European situation.

Once this event has been concluded, barring any new events, I would expect volatility to trend back down for the near-term future.

There is still the possibility of deadlock and increased volatility in the short-term.

Bottom line is this week will be very interesting.

Focus

Your focus should continue to remain on U.S. economics and earnings. After the European drama subsides all attention will turn to the Federal Reserve once again. I personally focus on employment and consumer spending. Both have been weak lately but the longer-term trend remains positive.

Jeff Miller has a great weekly piece which you can view here. I try to read a lot each week and I tend to enjoy his writing the most.

Positions

I currently have some short positions in volatility left over from last week. I will not be initiating any new short positions as the risk/reward has now evaporated with the drop in volatility from Friday. Contango has returned to VIX futures and I would expect that to remain for the short-term.



I appreciate you reading and please follow me on SeekingAlpha and this blog for regular analysis and updates on the VIX futures and personal finance. Have a great week!

Possible VIX Futures Scenarios

I wanted to do a quick simulation, for discussion purposes only, of the possible extent to which VIX futures could rise and fall into backwardation.

Ultimately I continue to believe we are limited to the upside here due to positive economics. If the economy does start to show weakness than it is just another excuse for The Feds to delay or tone down rate hikes and help the economy along. 

Again, these figures are rough estimates and meant to give you an idea of how far things could advance from here.

The current VIX futures term structure is below:

Here are my hypothetical points for F1/F2 futures and backwardation levels. Due to the nature of current events and their expected resolutions, I would expect higher backwardation levels.

In my articles I speak about wanting a 5-10% backwardation event. This is what that could look like. Again this is for illustration purposes only and I have pieced this together using historical VIX futures data.

During the writing of this article this happened:

It appears that Greece has offered a deal that sounds pretty good.

For now I am going to sign off and see how this plays out. It could make the above article completely irrelevant come tomorrow morning. 

Remember Janet Yellen speaks tomorrow at 12:30pm. 

Have a great night!

The Top 7 Ways I Save Money

I wanted to switch it up a bit and create a post on saving money. Home Depot's saying of "more saving, more doing" is really spot on. It's all about doing more with less. Below are the top seven ways I personally save money. Feel free to comment below and add to the discussion.


1. Largest Expenses First - More often than not, things like rent can be negotiable. Now obviously if you have a mortgage, you aren't going to have much luck. Mortgage rates are still low and many people have already refinanced.

I have found, in my area, that owning is considerably less than renting. This is not the case everywhere.

Always think of needs vs. wants. Do you really need a guest bedroom if no one ever visits? Saving money here can lead to a healthy down payment on what you really want later.

Automobiles are another large area that can be easy to overspend on. Think wants vs. needs. You need a car to get safely to and from work, school, doctors, family, etc. Other modes of transportation are available in larger metro areas. In most places I would list a vehicle as a need, but not a make or break one. My point is think about what you are buying. Do you really need a V8, shinny rims, or a premium sound system? All of these may sound great but decide if it is really worth it and think of the overall price. Only $10 per month more doesn't sound too bad until you realize its for 6 years and has a total cost of $720.

Shop around for insurance, whether it be auto, home, health, etc. You should shop these annually whether you think you need to or not. Make sure you are comparing apples to apples with quality companies.

Possible savings - $100 per month est. (a lot more for some)


2. Cell Phone - I know far too many people who claim to have money problems and pay $80 a month for their cell phones. There are lower priced options out there. All you need to do is talk, everything else falls under a want. I personally don't use data because I don't want to be connected when I am out. I want to relax and get away from it all. If there is an emergency someone will call me.

I tried out Republic Wireless a little over a year ago and it works perfect for me. It's $10 per month for unlimited talk and text, and I can get data over WiFi (no mobile data). Runs off the Sprint network and they have good coverage in my area.

Possible savings - $50 per month est. 


3. Cable - This is another area of life that counts as a want, not a need. When I tell people I haven't had cable in 7 years I usually will get a strange look followed by a "what do you mean you don't have cable." The fact is, when I visit people who have cable, I find nothing I want to watch. I would consider Internet a need for me since I often do extra work online.

I have a Roku box that allows me access to NetFlix and many other apps. Many apps with older shows or movies, and public channels, offer free content.

Possible savings - $30 per month est. 


4. Home Phone - I understand generational changes but I don't understand the concept of a cell phone and a home phone other than for business purposes. Many times it will be included with a package deal. You still have an option to remove it and it could save you money. I was speaking with a friend once who had a package deal and they stated that "the cable company said my bill would only go down $5 a month without the home phone, so I kept it." $5 a month adds up to $60 per year, plus tax.

Possible savings - $5 per month est.

5. Do Work Yourself - If you have home or small auto repairs that you can do yourself, give it a try. There is a YouTube video for everything! Never changed a windshield wiper blade? Watch a YouTube video or ask a friend for help.

Completing work yourself saves a lot of money. I remodeled my first house by myself for 25% of what it would have cost to hire someone to do it. This also ties into number one. Buy a fixer upper and do the work yourself, cheaper mortgage and a lot of pride once you're done.

Possible savings - $50 per month est.


6. Groceries - I buy things that are on sale. If pasta is buy one get one free, I'm there whether I already have a pack at home or not. The basics are usually always cheaper than processed foods. Grow a garden at home for extra fresh vegetables. Fresh foods can be cheap at the store but are seasonal. Take advantage of store apps, coupons, credit card deals (pay it off every month), or memberships.

Going out to eat once can usually buy me groceries for at least two days. Choose your meals out wisely. If you are in a rush crock pots are great ways to have dinner waiting for you.

Possible savings - $50 per month est.


7. Entertainment - Entertainment is an expense that will vary for everyone. Avoiding impulses can save you money. If you want to go bowling, you can usually get a better price on a Monday night rather than a Saturday night. Movies are often less in the morning than at night. Redbox is under $2 for a movie rental if you can wait until it is out of theaters. Check out local small business specials (support local businesses), Groupons, and free events in the local paper (free online).

Possible savings - $25 per month est. 


Total Savings

The above examples would save $310 per month. I tried to estimate low, in some cases you may be able to save more. Nothing sounds like a lot until it starts adding up. If you were to set this aside every month, in one year you would have $3720.



These are surely not the only ways to save money. Living within your means and saving money is essential for a healthy financial future. Eliminating debt can save you thousands of dollars, or more, over your lifetime.

Thank you for reading and I hope you save some money!

UVXY Jan 16 Options Reaction to Greek Drama

Chart courtesy of Optionshouse.com

The chart above shows the options action on the Jan 16 $80 Call option. On Monday 6/29 the market opened down over 1% due to the Greek drama.

During the week the option fluctuated from a high of over $12 to a low of $7.50.

Today the option recovered to $12 and settled at $11.

The chart below shows UVXY price action during the same period of time.

I wanted to create a table/chart that compared the movement of the option and the underlying security. See below:

Something else I found interesting was the scatter plot for this data set. See below:

I continue to hold a long position in XIV and have sold some Jan 16 $80 calls on UVXY.

If you enjoyed this article please feel free to share.

Thank you very much for reading!

Follow me on Twitter, Seeking Alpha, StockTwits, and/or Google+

Welcome to the new Volatility ETFs blog!

Hello everyone,

You may know me from SeekingAlpha, Twitter, StockTwits, or various other financial sites out there.

The reason I am creating this blog is to bring you, the investor, real time information on volatility ETPs. ETPs stand for Exchange Traded Products such as ETFs and ETNs.

My blog and my writings focus only on beginning to mid-level investors. I want to educate you about how volatility works, because it took me years to learn it on my own. Some times you just need to ask someone a question.

My volatility community is a no judgement educational zone. Feel free to ask questions even if you think they are dumb or unimportant. Not asking these questions could lead to serious consequences down the road.

Once you reach the mid-level investor phase my articles will appeal to you for news and I hope we can then learn from one another on what works and what doesn't. Think of it as a professional learning community.

I appreciate SeekingAlpha and will continue to write there. However, we have had some disagreements on what should and shouldn't be published (such as their ban on options articles) and the sometimes very long wait times to get an article published. If a situation is in process I want to be able to communicate with you, the reader, as soon as possible. Twitter and StockTwits are great but I can only say so much in 160 characters or less.

The best compliment you can give me is to share my work and follow me on these websites. Traffic is really the only way I can reach more people and try to make a little money. If you know me you know I believe education should be free and that is why I do not run a for profit website or charge for subscription services, which I could easily do.

Most of the money I make from these articles finds its way back into public education by purchasing school supplies for my students, 85% of whom come from homes below the poverty line.

Again, thank you for sharing my work and helping me to take this next step in my volatility education crusade.

Sincerely,

Nathan Buehler