Extreme Reward but High Risk for Leveraged Inverse Crude Oil DWTI and DTO

Aug 19, 2015: 11:32 AM CST

How would you like to buy a stock – or ETF – that tripled in value in less than two months?

Sounds impossible?  It’s not – that’s exactly what triple leveraged inverse fund DWTI did recently.

Shares of the ETN tripled from the $60.00 per share level to the breakout high above $180.00 today.

Let’s take a look at this monumental movement but also highlight the huge risk inherent in any double or triple ETF.

Here’s DWTI, the Triple Inverse (3x Short) Crude Oil ETN:

If oil moves up 1% in a day, the DWTI ETN (ETF) is calculated and balanced to return as close to -3% as possible.

And if oil moves down 1% in a day, the ETN “should” return close to a 3% price gain.

Because commodity prices tend to trend or move in one direction for a sustained period of time, this can quickly add up for those holding positions.

The reward can be large, as seen from December into January with a powerful movement up from $50.00 to $200 (quadrupling in two months) or the March 2015 movement from $100 to $180 in about two weeks.

That’s an extreme, powerful, and potentially large return for those who bought this fund into the downswing in the price of Crude Oil.

Of course, in the real world, you’re not going to buy the bottom and sell the high.

There’s another hidden reality to this golden profit machine and it’s the immense drop or collapse in price during even a modest (small) rally in the price of Crude Oil.

The lower chart plots $WTIC – Crude Oil itself – with two yellow highlighted periods.

At the time when Crude Oil “only” moved up from the $45.00 level toward $50.00 per barrel, the price DWTI collapsed from $200 to $100, losing half its value in one week.

With great reward comes immense risk.

The exact same event happened in late March during a two-week period where price was slashed from $180.00 to $90.00 and then lower toward $60.00 in May (collapsing throughout April).

Keep this fact in mind when trading a position in double and triple leveraged – and especially leveraged inverse – funds.

However, we do note the tripling of price from July to present, surging from the $60.00 per share base to the current $180.00 high.

If your wish to trade these type of aggressive funds, seek to capture a piece of the big movement, NOT the entire movement.

Also, if the position starts to go against you (a buy position quickly becomes a loss), take the stop-loss and sell the position immediately.

DO NOT “Hold and Hope” that things will work out if you’re patient.

You expose your position to a literal melt-down if you’re on the wrong side of a double or triple leveraged fund.

Here’s a chart of a double inverse Crude Oil ETN – the PowerShares DTO:

Compare the double inverse leverage – moving up from the same $60.00 per share base toward (this time) the $120 level.

New traders should start with standard (no leverage) ETFs and ETNs and build experience from there.

Then try your hand and build experience with double leveraged funds if you desire more reward – with more risk.

Finally, with a track record of success – and an understanding of how these funds work – a trader can graduate to the triple and triple inverse world.

The alternative would be to use these funds as day-trading vehicles only, not as swing trading candidates.

Don’t be lured by out-sized gains – also be fully aware of the risk of any fund or stock you buy (or short-sell).

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Corey Rosenbloom, CMT
Afraid to Trade.com

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3 Comments

3 Responses to “Extreme Reward but High Risk for Leveraged Inverse Crude Oil DWTI and DTO”

  1. Sajjad Says:

    I believe for any experience trader this might be perfect opportunity, but as a low investor, it’s very risky and probably something that should be avoided unless we are very sure about things. I am lucky that I can be aggressive and take such risk, as it’s possible only with OctaFX broker where I get lovely facility with their rebate service to help me earn up to 15 dollars profits per lot size trade and that too even on the losing one’s too.

  2. Extreme Risk and Reward: Follow-up on the Collapse of Leveraged Oil Funds DWTI and DTO | Afraid to Trade.com Blog Says:

    […] Extreme Risk and Reward: Follow-up on the Collapse of Leveraged Oil Funds DWTI and DTO Sep 3, 2015: 2:49 PM CST I absolutely was NOT kidding when I stressed the extremely high risk of trading inverse leveraged Crude Oil funds! […]

  3. Extreme Risk and Reward: Follow-up on the Collapse of Leveraged Oil Funds DWTI and DTO | Margin of Safety Says:

    […] I absolutely was NOT kidding when I stressed the extremely high risk of trading inverse leveraged Crude Oil funds! […]