"Fun" Money: Short Oil?

[blood_donor]

I have a responsible, low cost, diverse set of investments in my Roth IRA and 401(k). That being said, when I see $120/bbl oil, with an exponential like rise in the last few months, I get itchy to gamble.

So I'd like to take a small part of my portfolio, say about 4%, and use it to short oil. I see a few ways to do this:

Oil futures
Short sell an energy ETF
Options on energy ETF
Buy short oil ETF (DUG, for example)

The most convenient way, and possibly a less risky way seems to be to buy the short oil ETF. Short selling requires borrowing and paying interest (much higher than the 1% management fee of DUG). Options on an energy ETF would work, but are scary risky, since they can easily go to $0 value. I don't even want to think about trading oil contracts directly.

What do you guys think?

[ken250]

blood_donor...I would save that 4% for my first year's retirement withdrawal.

[cflannagan]

I have a responsible, low cost, diverse set of investments in my Roth IRA and 401(k). That being said, when I see $120/bbl oil, with an exponential like rise in the last few months, I get itchy to gamble.

So I'd like to take a small part of my portfolio, say about 4%, and use it to short oil. I see a few ways to do this:

Oil futures
Short sell an energy ETF
Options on energy ETF
Buy short oil ETF (DUG, for example)

The most convenient way, and possibly a less risky way seems to be to buy the short oil ETF. Short selling requires borrowing and paying interest (much higher than the 1% management fee of DUG). Options on an energy ETF would work, but are scary risky, since they can easily go to $0 value. I don't even want to think about trading oil contracts directly.

What do you guys think?

I would not ever recommend shorting anything. The share price upside is unlimited. Even though something might seem overpriced a long time ago, it often does the unexpected and continue to increase in price, forcing you into short squeeze.

Case in point: Back then when I was a "Complete Growth Investor" subscriber (pre-Boglehead days for me), Jeff Fischer shorted Amazon stock. At the time, it made a lot of sense. All kinds of security analysis showed the stock was overpriced.

Yet, Amazon share prices continued to grow, and grow, and grow. More than a year, I believe. Eventually Jeff was forced to use an option strategy to limit his loss w/Amazon share prices if it continue into its direction, if I recall correctly.

Not sure what the overall outcome was w/this, but it wasn't pretty. Fortunatley for me, I don't subscribe to the idea of shorting anything.. so I was spared of this carnage while other subscribers were not as fortunate.

[Gordon]

in 1998 at 750 hung on while it went up to around 1500 and back down to 750 and covered. The lesson was worth the trip.

[stratton]

Read this thread on the Inverse Oil ETF before you buy into these type of funds.

Paul

[Chet]

The most convenient way, and possibly a less risky way seems to be to buy the short oil ETF. Short selling requires borrowing and paying interest (much higher than the 1% management fee of DUG).

Short selling does not require paying interest. You are not borrowing money, you are borrowing the ETF and selling it. You get money which is then held for you in a non-interest bearing account.

But short selling is indeed a bad idea because you are not getting interest on that cash, so getting nailed by inflation (the same inflation that is making oil go up).

All the same problems apply to the short ETF (plus high management fee), but the details are more hidden.

Chet

[paulob]

You mentioned an IRA and a 401-k. Unless you are planning to invest via a taxable account, you won't be able to short anything. If that is the case, that leaves two inverse funds, DCR and DUG. The latter is tied indirectly to the price of oil as it's benchmark has equity stocks of equipment companies including the coal industry.

DCR would seem to be the logical choice as it more closely tied to the price of oil. But read the other thread previously linked in the conversation. I would stay far away from this ETF based on that thread alone.

I too, like to gamble. But I don't see that now is the time to short oil. If you do, I would liken it to pumping gas without an automatic shut-off. You best stay close to the pump until you are done.

[Opponent Process]

I'd rather buy a clean energy ETF. The price of oil is not going down short of the Rapture.

[blood_donor]

See, it's comments like this that make me itchy! Every time a bubble is about to burst, it seems like you have these signs:

People who aren't usually involved in a market jumping in, often with money they can't afford to lose;
Pundits saying the price won't come down to historical levels, "this time it is different!";
Exponential increases in price without changes in underlying fundamentals;

I'd rather buy a clean energy ETF. The price of oil is not going down short of the Rapture.

[Opponent Process]

See, it's comments like this that make me itchy! Every time a bubble is about to burst, it seems like you have these signs:

People who aren't usually involved in a market jumping in, often with money they can't afford to lose;
Pundits saying the price won't come down to historical levels, "this time it is different!";
Exponential increases in price without changes in underlying fundamentals;

I'd rather buy a clean energy ETF. The price of oil is not going down short of the Rapture.

I'm just saying you'd need oil to go down to make money shorting it. It's even harder to predict a downward path than it is an upward path, especially since assets tend to trend upwards (or fiat currencies trend downwards).

I also don't believe in bubbles. It's no more credible of a concept than any other TA jargon. You can't even arbitrarily define a bubble until after the fact. Was the US stock market in the 20th century a bubble? No one ever calls it that. It just is what it is. Japan was a bubble because it collapsed. Tech was a bubble because it collapsed. Oil is also a finite resource.

[paulob]

Exponential increases in price without changes in underlying fundamentals;

Since oil is a commodity, isn't the gist of the fundamentals based on supply and demand?

If so, how long will it take for world supply and demand to counterbalance the alleged "bubble"?

I do, however, believe that the price of oil will go down. Just when and how much, I don't know.

If I buy an energy related investment in the near future, it will be long/not short. I believe the odds support a long position and the upside to a short position is minimal.

[market timer]

Some of the comments are incorrect. If you trade futures or inverse ETFs, you will receive interest on your cash. DCR would not be a wise instrument to use for long term speculation, since it is now a short term option contract. I'm not generally a fan of moving from real assets into nominal assets, so you could consider pairing this trade with a different one that involves moving from nominal assets into real. For example, sell oil and buy an equivalent amount of VTI or REITs.

[matt]

Many have already called the top in oil. They did it at $20.
...and $30,
$40,
$50,
$60,
$70,
$80,
$90,
$100,
$110.

So tell me what makes $120 the right price to short.

[envgeo]

I am in the oil and gas business and the one thing I do not do is predict commodity prices. I encourage hedging, but not speculation. These things can move against you very quickly and the old adage is that the market can stay irrational a lot longer than you can stay liquid.

[Wagnerjb]

I am in the energy industry, and have been for 25 years. When oil suddenly rose from $30 per barrel to $50 a barrel a few years ago, many in the industry - including myself - were sure it would decline back into the longer term level of $20-$30 per barrel.

If I had "play money" I would have shorted oil at $50. I would short it at today's price too....but this just shows that the "no brainer" bets are sometimes losers. I would also have bought Enron at the bargain price of $4 per share too, since that seemed like a "no brainer" to those in the industry who knew all the traders at Enron.

Good luck.

[market timer]

Ladies and Gentlemen, I've traveled over half our country to get here this evening. I couldn't get away sooner because my oil contracts were reaching my limit sell orders and I had to see about it. Those trades are now firing at two thousand barrels a tick and it's paying me an income of five thousand dollars for each additional penny of oil. I have two other trading operations and I have positions in sixteen oil majors. So - Ladies and Gentlemen - if I say I'm an oil man, you'll agree.

I'd short oil here and start covering at $100/bbl.

[schwarm]

See, it's comments like this that make me itchy! Every time a bubble is about to burst, it seems like you have these signs:

People who aren't usually involved in a market jumping in, often with money they can't afford to lose;
Pundits saying the price won't come down to historical levels, "this time it is different!";
Exponential increases in price without changes in underlying fundamentals;

I don't think your last statement is accurate. World liquid fuel production has been flat for the last three years despite increasing prices. Prior to this time, there was excess production available to control the price of crude oil. I don't think there is any substantial excess production now.

[RaleighStClaire]

Ladies and Gentlemen, I've traveled over half our country to get here this evening. I couldn't get away sooner because my oil contracts were reaching my limit sell orders and I had to see about it. Those trades are now firing at two thousand barrels a tick and it's paying me an income of five thousand dollars for each additional penny of oil. I have two other trading operations and I have positions in sixteen oil majors. So - Ladies and Gentlemen - if I say I'm an oil man, you'll agree.

I'd short oil here and start covering at $100/bbl.

Very nice

[daryll40]

I hate to admit this, but I shorted USO @$76 when the price of oil was about $96. And I further hate to admit this, but I shorted ALOT and am buried in the short! It's still a relatively small amount of money compared to my overall situation, but the worst "play money trade" I've ever done. I made a bundle shorting IYR, the REIT index fund last year. Gave it all back. Proves the basic DIEHARD principal that one can't time markets!

Frankly I feel paralyzed and this is Chinese water torture. Every day it goes up and up without ever pulling back.

[market timer]

I hate to admit this, but I shorted USO @$76 when the price of oil was about $96. And I further hate to admit this, but I shorted ALOT and am buried in the short! It's still a relatively small amount of money compared to my overall situation, but the worst "play money trade" I've ever done. I made a bundle shorting IYR, the REIT index fund last year. Gave it all back. Proves the basic DIEHARD principal that one can't time markets!

Frankly I feel paralyzed and this is Chinese water torture. Every day it goes up and up without ever pulling back.

Did you cover for a profit recently?

[blood_donor]

Call it beginner's luck, or whatever, but I did in fact put a little money into DUG when oil was at around $130. I hung on until it got down to $85, then sold...

Did I make lots of money? No, because I was only man enough to risk $1500. Did I make a huge percentage gain? Yes.

But the rest of my portfolio got killed by the broad market downturn!

[shelanman]

I'd rather buy a clean energy ETF. The price of oil is not going down short of the Rapture

Did I miss the Rapture?

(I keed, I keed )

[daryll40]

I hate to admit this, but I shorted USO @$76 when the price of oil was about $96. And I further hate to admit this, but I shorted ALOT and am buried in the short! It's still a relatively small amount of money compared to my overall situation, but the worst "play money trade" I've ever done. I made a bundle shorting IYR, the REIT index fund last year. Gave it all back. Proves the basic DIEHARD principal that one can't time markets!

Frankly I feel paralyzed and this is Chinese water torture. Every day it goes up and up without ever pulling back.

Did you cover for a profit recently?

The whole experience was not pretty. You can figure out what that means.

[dumbmoney]

Shorting is a hard way to make money, that's for sure. Just ask the hedge funds having "fun" with Volkswagen.