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!

I wanted to follow-up that prior post with today’s chart highlighting the collapse in price of these funds during a modest recovery in Crude Oil.

Let’s start with the 3x inverse leveraged Crude Oil ETN – symbol DWTI:

First, take a quick moment at least to review the charts from my August 19th update on these funds.

I simply stressed for readers to be fully aware of the extreme risk of trading these funds (mores specifically, holding them as a swing trade longer than a day or more… it’s fine to trade these intraday).

Look at the chart above to see exactly why I found it so important to stress the risk – not just focus on reward.

As oil prices recovered from the $40.00 level toward $50.00 per barrel, the triple inverse leveraged ETN collapsed from above $230.00 per share to the current “bargain basement price” of $100.00 per share.

I highlighted – which I’ll do again – the two prior collapses in price in January and March of 2015.

Yes, it sounds wonderful – and it is – to make money by trading a triple leveraged inverse fund when Crude Oil is collapsing, but losing all that money and more in just a few days is absolutely not fun – and you might determine that it’s not worth the risk.

Here’s the same update on the double leveraged inverse fund DTO:

Similarly, shares of DTO collapsed from $130.00 down to the $90.00 level where we’re seeing a spike today.

Here’s the main point updated:

KNOW WHAT YOU ARE DOING when you trade leveraged and inverse leveraged funds.

If you don’t, then you will most likely lose a lot of money quickly – especially if you only focus on gains.

I recommend using leveraged and inverse funds ONLY as day-trading vehicles, or at best holding for a two or three day period.

DO NOT invest with these funds and know that inverse leveraged funds WILL fall must faster than they rise.

In late January, three days completely eliminated the gains of the entire month of January.

Though March saw a strong bullish surge, all of it and more was wiped out just as quickly.

Finally, September’s three day plunge completely erased all gains from August – and they were sizable, respectable gains.

Again, know your risk, read the prospectus, know what’s reasonable, and act accordingly.

And take stops if you’re losing money in leveraged positions – a small stop with a small loss is far preferable to holding on and hoping as price literally collapses from $220 to $100… in three days.

One alternative to trading high priced stocks and optionable ETFs is through options.

John Carter released a new educational video this week detailing how he grew a trading account from $150,000 to $650,000 in the eight months so far in 2015.

How’d he do it?  And more importantly, how can you copy and apply what strategies he used?

Check out his video, linked in the image below (from John’s site):

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

Corey’s book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

2 Comments

2 Responses to “Extreme Risk and Reward: Follow-up on the Collapse of Leveraged Oil Funds DWTI and DTO”

  1. Extreme Risk of Trading Inverse Leveraged Crude Oil Funds Says:

    […] By Corey Rosenbloom […]

  2. Dale Says:

    This is the biggest challenge in trading to manage Risk and Rewards, if we are able to do this correctly then we can find plenty of things working well, but if we are unable to do this well then we are obviously in for struggle, so that’s why we need to be very careful and currently with my broker OctaFX, it makes thing much easier with their rebate program where I get 15 dollars profits per lot size trade even on losing trades.