|
Back on 4/30/08 I wrote about an oil arbitrage that I had entered into with the Macroshares Up (UCR) and Down (DCR) Shares. Because of the paired structure of those two securities the overpricing of DCR resulted in an underpricing of UCR (or vice versa). Since DCR couldn't be easily shorted I purchased UCR and offset the oil price risk by also purchasing June 96 puts on USO. It was essentially a risk free trade. Here is how it worked out as DCR ultimately became worthless and UCR maxed out at $40:
| Date |
Trade
|
Security
|
# Shares
|
Amount
|
| 4/25/08 |
Buy
|
UCR
|
1680
|
$61,204.50
|
| 4/25/08 |
Buy
|
IYSRR
|
700
|
$4143.25
|
| 6/24/08 |
Sell
|
UCR
|
1680 |
$67,107.61
|
| 6/24/08 |
Expired
|
IYSRR
|
700
|
$0
|
The net gain was 1759.86 or 2.7% over 2 months, which is essentially a year's worth of interest at current money market rates. However, there was additional value in the entertainment factor - following the message boards for DCR as the price came back down to earth. It was a remarkable educational experience since I was able to learn why DCR was overpriced. Essentially there were a lot of irrational long positions:
- Some longs didn't realize the shares were expiring
- A lot of these people viewed this security as a lottery ticket
- There was a lot of irrational optimism. Almost every day someone posted that the price of oil was guaranteed to crash that day.
- People were clearly not aware that there were better priced alternatives available - namely the USO puts - despite many people discussing this
- A lot of day traders seemed to be trading these shares, thinking that they could read some pattern in the stock price movement.
- As DCR got cheaper many of these people concluded that there was less to lose - huh?
Needless to say the DCR longs were wiped out.
In July Macroshares is coming out with new up and down shares anchored to a higher oil price. It will be interesting to see if these pricing anomalies repeat.
| 
