OIL STOCKS leading CRUDE OILWhat do you mean by a spread? A spread is a difference between two similar markets, in this case oil stocks and oil service companies versus the basic commodity that those oil companies trade in, which is crude oil.
There is a substantial trade set up at the moment that presents large returns with a reasonable amount of risk. Shorting Energy Stocks using the $XLE ETF and going long oil with the $USO ETF.
In the last two instances, it was $USO that was leading higher without $XLE to support the advance, and $USO collapsed to close the spread. See chart enclosed above.
Why does this spread exist? We can point to political promises to "end the use of oil" that forced investors to reconsider the long term valuations of oil stocks. Investors don't typically "own oil" through oil futures, rather they own "oil in the ground" by way of oil companies.
Risk $5-$10 in crude oil and 5%-10% in $XLE roughly. If one market moves more than 5% then we can look to increase the position and tighten the stops to break-even.
There is no specific 'catalyst' to drive this pair back together at the moment. If the economy opens back up globally, then oil demand estimates will rise and cause people to buy oil futures. Opening up could also drive energy stocks higher too due to very high margins currently in the processing of crude oil into their refined products.
The only risk in life is taking no risks. Nothing is without risk. Holding cash leaves you to be exposed to inflation and the loss in purchasing power. The rest of the disclaimers are standard legal ones. I have no positions in this trade yet, but will be considering them.
A good way to manage risk is to use options in the form of spreads on both sides of this trade to define a maximum amount of risk in advance. Buying a call spread on $USO and buying a put spread on $XLE would serve to manage risk intelligently. The duration of this trade should be 3 months at maximum.
