Playing The Oil Trend With UWTI

Playing The Oil Trend With UWTI

22 March 2016, 07:32
Roberto Jacobs

Playing The Oil Trend With UWTI

  • The VelocityShares 3x Long Crude Oil ETN allows for traders to make three times the profits when investing in the oil trend.
  • Finding the bottom of West Texas Intermediate oil prices is the best way to determine a buy signal for an oil exchange-traded fund.
  • While downside risks are real, a rally into the $40s could keep the price of crude oil in a trading range above its February bottoms.

The best way to cash in on a trend in crude oil is not by buying and selling the contracts, but watching ETFs that track their prices. Over the past two years, these exchange-traded funds have become very popular as oil prices plunged to sub-$30 levels. In a MarketWatch article, the VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWTI) was cited as being the fifth-most traded security by Millennials.

UWTI is hardly a tool for hedging against the risk of volatile oil prices. Instead, traders use the derivative as way to bet on different oil trends, hoping to cash in on the accelerated payout it offers. This ETF generates a whopping 119 million shares of average volume, despite year-to-date losses of over 38%. Its popularity trumps both the iPath S&P Crude Oil Total Return Index ETN (NYSEARCA:OIL) and the United States Oil ETF (NYSEARCA:USO), which average about 5 million and 51 million shares, with YTD losses below 25%.

There's no doubt that UWTI provides traders the opportunity to cash out on an accurate projection of oil prices, but its high leverage and volatility can translate to large, sudden losses if a trend reverses. The best way to reduce risk created by unexpected, short-term fluctuations is to buy at the very bottom of the trend and hold until it tops off in the long run. With the market beginning to tame, investors should start to consider this trade before it's too late.

During the week ending March 12th, the price of West Texas Intermediate contracts rose from the low $30s as investors finally saw production slow down. Baker Hughes reported earlier that week that rig counts fell to an all-time record low of 480, instigating pent-up bullish sentiment. Recent evidence showing a decline in production has caused gains of just over 20% in the past month of trading sessions.

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