Crude oil has had a wild ride this year. It seemed every day in January oil was making new lows before it bottomed in early February at $26.05.The last five weeks have been the opposite, with almost every day a green day for the black gold.
Crude oil futures looked to have finally topped out at $42.49 earlier this week, before pulling back under $40.00 yesterday. Now it looks like shorts sellers of crude and oil related companies have a solid entry where they can start short positions. Both the commodity and oil stocks look to trend lower into earnings season and risk can be realized with stops at the highs of the year.
Oil is due for a sell off and it wouldn’t be a big surprise if we saw a pullback to the $34-35 area sometime soon. While the pullback starts to form, investors can profit from a fall in oil by buying the ETFs below.
VelocityShares 3x Inverse Crude Oil ETN (DWTI)- This ETN is an investment that seeks to replicate, net of expenses, three times the opposite (inverse) of the S&P GSCI Crude Oil Index ER. The index comprises futures contracts on a single commodity and is calculated according to the methodology of the S&P GSCI Index.
DWTI is a very volatile product that allows bearish oil investors to maximize their gain. If oil falls 5% in a day this ETN will rise 15%, maximizing the bearish bet that is made. DWTI will pull back fast when oil heads higher, so I only encourage short term trading with this instrument.
ProShares UltraShort Bloomberg Crude Oil (SCO - ETF report) - This investment seeks to provide daily trading results that correspond to twice (200%) the inverse of the daily performance of the Bloomberg WTI Crude Oil SubindexSM. The “UltraShort” Funds seek daily results that match (before fees and expenses) two times the inverse (-2x) of the daily performance of a benchmark.
Very much like DWTI, this will move higher as crude oil moves lower. If oil is at $40 a barrel and falls to $39, we would see a 5% move higher in SCO reflecting the 2.5% move in crude lower. The main difference between SCO and DWTI is what magnitude, higher or lower, a trader is looking for.
ETFs to short oil and gas companies
Direxion Daily Energy Bear 3X ETF (ERY) - This ETF is an investment that seeks daily trading results, before fees and expenses, of 300% of the inverse of the performance of the Energy Select Sector Index. The fund creates short positions by investing at least 80% of its assets in: swap agreements; futures contracts; options; reverse repurchase agreements; ETFs; and other financial instruments that, in combination, provide inverse leveraged and unleveraged exposure to the index.
ERY is the same concept of DWTI, except the shorting aspect looks to focus on actual energy companies rather than crude oil futures. This might benefit a trader if he wants to go short a basket of energy stocks right before earnings season. The trader might be thinking that because of low oil prices, these energy companies will report negative earnings, leading to lower stock prices. This event would push ERY higher even if crude oil futures remained flat.
ProShares UltraShort Oil & Gas (DUG) The investment seeks daily investment results, before fees and expenses, that correspond to twice the inverse (-2x) of the daily performance of the Dow Jones U.S. Oil & GasSM Index. The index measures the performance of the oil and gas sector of the U.S. equity market.
DUG is will move in a similar manner to ERY, but a down move will only reflect twice the performance instead of three times.
ProShares Short Oil & Gas (DDG) - This investment seeks daily trading results that correspond to the inverse (-1x) of the daily performance of the Dow Jones U.S. Oil & GasSM Index. The investment seeks daily investment results that correspond to the inverse (-1x) of the daily performance of the Dow Jones U.S. Oil & GasSM Index.
DDG will move in a similar manner, but a down move will reflect the actual move instead of the leveraged gains that DUG and ERY have.
A trader will utilize the above mentioned instruments to short oil and gas stocks. They all offer different forms of risk and can be chosen depending on the trader’s willingness to accept risk.
iPath S&P 500 VIX ST Futures ETN (VXX - ETF report)- This ETN is a sympathy and fear play if oil prices were to return to the low $30s. This kind of event would create fear, bringing a bid back to the VIX. This ETN will head higher whenever the VIX and VIX futures head higher.
