Tuesday, March 8, 2016

The Hardest Lesson: The Idiocracy Isn't Playing Dumb

Everyone with half a brain - meaning no one at CNBS - sells "oil" aka. the expiring contract ahead of expiration, as fantasy meets reality. 

USO gets pounded every month at expiration:

There are two parts to the max pain trade:
1) Rollover Loss: The difference between the expiring and contract and the next month contract

2) Expiration Loss: The loss incurred by holding the expiring contract until it's marked to Cushing.

Both types of loss accelerate towards the third week, as buyers flee the expiring contract en masse and short-sellers pound it lower, amid zero liquidity...

Rollover loss is already -5%. But as we see at the last month rollover it was -10%. Only a dunce hangs on to the end, which exacerbates liquidity in the final days to expiration:

Expiration loss: 

This is the April (expiring) contract relative to the spot market baseline I created from last month's expiration. This is the full amount "oil" could fall in the next two weeks as the April contract converges with reality:


Where is the spot market this month? Put it this way, everyone who is rolling over, has to sell between now and expiration, which includes the ETF, which usually takes the full brunt of rollover drawdown. 

And bear in mind that every risk asset on the planet will be along for the "discovery process", therefore they're all going to receive a free lesson in how the futures market really works. Just like the lesson they ignored the last five months...