A week ago we warned of some insane movements and mysterious bid in OIL (the Barclays iPath oil tracking ETN) as it traded a stunning 36% rich to its underlying NAV. Well with oil resurgent today, as contracts roll, something just imploded in OIL...
As Barrons noted, the sharp performance divergence stems from the ETN’s massive price premium over the value of the index it tracks.
Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, notes that OIL’s premium rose sharply in recent days and accelerated to 48% by Wednesday’s close. He told Barron’s that institutional traders noticed the extreme premium and are now betting against OIL on the premise that the unusually large premium will revert to normal. Trading volume in OIL was already more than triple the average over the past month on Thursday with three hours left in the trading day.
Even after today’s drop, OIL is still at a roughly 20% premium to its underlying index.
Chintawongvanich says that it’s not too late for investors who own OIL to ditch it for USO: “You don’t want to be stuck holding the bag when this drops to NAV.”
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Simply put - retail moms and pops who piled into OIL without thinking about NAV or technical flows just got f##ked!
As we concluded previously, The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.