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I'm determined to squeeze every last dime out of the MacroShares. As I reported last week, I closed out my arbitrage on these shares for a nice profit once they triggered early termination. I was hedging the Up MacroShares (UCR) with a short on the United States Oil Fund (USO) but this became a rather sloppy hedge once oil started to get really close to $120/barrel and the early termination triggered. The reason for this is that the down shares (DCR) ultimately became June puts on USO with a strike price of 96 (each USO share ~0.8 barrels of oil). The UCR shares are essentially $40 cash with a short on a share of DCR. I closed out my position and then reevaluated the situation.
Then late last week I decided to compare the price of DCR with the June USO puts and concluded they were a bit expensive so I entered into another arbitrage. The strategy works like this: USO puts on 125 shares (100 barrels of oil) are equivalent to 300 shares of DCR, while 300 shares of UCR would be equal to $12,000 - 300 shares of DCR. So I could buy 300 shares of UCR and offset the DCR short by buying cheaper USO puts. Of course, puts only come in 100 share increments but I've picked these ratios to simplify the example. Here's how the math works:
| | USO | USO June 96 Put | UCR | Total |
| Investment | | | | |
| # Shares | | 125 | 300 | |
| Cost | |
$ 5.90 |
$ 36.43 | |
| Total | |
$ 737.50 |
$10,929.00 |
$11,666.50 |
| | | | | |
| Scenario #1 | | | | |
| Price | 96 |
$ -
|
$ 40.00 | |
| Value | |
$ -
|
$12,000.00 |
$12,000.00 |
| Gain | | | | 2.9% |
| | | | | |
| Scenario #2 | | | | |
| Price | 90 |
$ 6.00 |
$ 37.50 | |
| Value | |
$ 750.00 |
$11,250.00 |
$12,000.00 |
| Total | | | | 2.9% |
These two scenarios should be sufficient to demonstrate that the end value of the investment is independent of the price of oil. If you don't believe me you can try a few. So I would expect to earn about 2.9% on my investment in less than a 2 month time frame - not a huge amount but much better than money funds. The only catch here is that my assumption that USO will move exactly in proportion to oil might not be totally valid for a whole variety of reasons including backwardation in the oil market. It's too complicated to go into here. I'm willing to risk it because I think I am just as likely to benefit from these effects as I am to lose.
So far I've been flat to up on this position. Yesterday the opportunity (as I see it) was still there, while today it seems to have narrowed a bit. It could be larger again tomorrow for all I know.
Speaking of oil
I've heard so much in the press lately about speculators driving up the price of oil. Am I missing something here? There is no way that speculators can have a lasting impact on the price of oil because they don't take delivery. If they were stockpiling the stuff I could understand the claim because they would be increasing demand. However, in reality they don't take delivery which means that they have to sell off their position before expiration of the contract and if the demand is not there the spot prices would decline. But we don't see the spot prices declining so I don't see how we can blame the speculators. I think it's partly legitimate demand and it's partly the Fed trashing the dollar. We'll see what happens here when they Fed stops cutting rates.
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