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Summary During oil’s first slide earlier this year, I started trading UWTI. Initial success was of course followed by huge losses through the decay in pricing that tends to occur in leveraged funds. Let my experience be a lesson to all those considering messing with leverage. The beginning was great. I made the ultimate mistake. I bought based on what I “wanted” to happen, as opposed to what was “actually” going on. I first bought the VelocityShares 3x Long Crude Oil ETN (NYSEARCA: UWTI ) back in March for $2.24. Less than a month later I sold at $2.53. As the Exchange traded notes kept climbing I bought back in again at $2.82 and sold at $3.20. Suddenly, I was hooked on the volatility of oil ETFs and ETNs. For those who aren’t familiar, ETNs or “exchange traded notes” are sort of the risky cousins of ETFs. They’re unsecured debt securities. They offer a way to get in on the short term moves of whatever the commodity is that it represents. In UWTI’s case, it also offered leverage. Leveraged 3x, I was making basically making 9% off of every 3% gain in the oil index that the ETN tracks. I had some pretty cool returns going off of this bad boy. Oil was recovering from the first time it was down in the low $40/high $30 range. I was having so much fun with the returns that I turned a blind eye to the long term risks involved with ETNs. You see, if you screw up with a leveraged ETN trade, you need to just cut your losses and sell quick. There’s always a catch Canary Cash has a small article touching on the decay involved in leveraged ETNs. If you note Canary’s simplified chart example below, you can see the effects that percentage change has on pricing. ( Source ) Big shoutout to Canary Cash. Back to my downfall… After my success with UWTI, I thought I could keep it going. Oil kept climbing, so I kept buying. My last successful purchase was at $3.42, and I sold at $3.61. Emboldened, I completely ignored the fact that declining rig counts wasn’t having much affect on supply increases in crude. I bought in again at $3.64 believing the sky was the limit. Was it a dumb buy? Absolutely not. The mistake was not paying attention. Due to the big unrecoverable hits you can take on leveraged ETNs, you have to watch them closely and cut your losses quick if you start to lose. I was over confident. My past success had me thinking I couldn’t lose with this wonder security. Two weeks later, oil was in the beginning of its next downtrend…and I was kicking myself for losing a big portion of my previous gains. Did I take my medicine, cut my losses and sell? You all know the answer to that one. I waited. I thought “maybe oil will jump back up and I’ll get it all back”. Did it happen? You know the answer to that one too. UWTI’s chart says it all…. (source: nasdaq.com) Lesson Learned….. Today, UWTI is trading at just around $1. Decay, combined with oil’s downward spiral killed me. I sold last week in pure disgust with myself. It was my first experiment with leverage and it will The lesson I took away is just not to mess with leveraged anything ever again. If you don’t want to heed that warning, at least take my mistake as a clear indicator that if you buy a leveraged security and you lose, just cut your losses so you don’t lose big. Sigh….it still hurts to talk about it. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News