The VelocityShares 3X Long Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return (NYSEARCA:UWTI), which looks to capture three times the daily move of oil futures, soared more than 14% on Wednesday. You can thank oil prices, which climbed more than 5% following news that OPEC had reached a tentative agreement to cut oil production by as much as 700,000 barrels a day.
Anyone looking for a “safer” way to trade energy from here could consider a regular play like the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE). But traders looking to lever up and ride oil higher in the short-term should go straight for UWTI.
It is important to note that UWTI is designed to capture the daily price move of crude oil futures and is not designed to for long term investment. The prospectus (PDF here) for the ETN shows how it’s designed.
A chart showing the difference in performance between UWTI and crude oil futures highlights the relative underperformance versus oil futures over the long-term.
Technically speaking, UWTI has finally broken out of the downtrend after doing some base-building. Since this ETN is designed for short-term, aggressive positioning, it is best to stay short-term as well on any technical analysis.
UWTI: What You Should Know
Already, people are raising doubts over the most recent OPEC agreement. A 700,000-barrel production cut is small in relation to the current 33 million-barrel-per-day production. Other big oil-producing countries, such as the U.S., Mexico and Russia, are not OPEC members and could easily ramp up production to fill the void.
The old trader’s adage regarding OPEC agreements of “Meet, Cheat and Retreat” hints at the difficulty of actually abiding by the production cuts, especially for OPEC members such as Libya and Iraq.
Longer-term investors may want to consider using a non-levered oil surrogate like United States Oil Fund LP (ETF) (NYSEARCA:USO) or major oil stocks like Exxon Mobil Corporation (NYSE:XOM) to make a bullish investment in oil. My latest post from a few days ago shows how to use an options strategy on XOM to position bullishly with defined risk.
But for short-term traders looking to add some giddy up to the trading toolbox, using a triple levered ETN line UWTI certainly can provide explosive profits. While oil jumped 5%, UWTI jumped 14%, so the possibility to make big-time, quick profits is certainly there. Of course, the risk is also greater as well.
Just make sure you have a good understanding of how the levered funds work before jumping in.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
