What Is The USO ETF?

United States Oil Fund

The United States Oil Fund (USO ETF) is an ETF designed to track the daily price movements of West Texas Intermediate (“WTI”) light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE.

The investment objective of the USO ETF is for the daily changes in percentage terms of its shares’ NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO’s Benchmark Oil Futures Contract, less USO’s expenses.

USO’s Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

The USO ETF invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Crude oil is one of the most important physical commodities in the global economy. Light, sweet crude oil futures are the most actively traded futures contracts and represent the primary US benchmark for crude oil.

What are The Benefits of using the ETF USO?

There are many great benefits to trading the USO ETF. One is that it is a way for the small trader to trade in the commodity market. With a futures contract a trader needs much more capital to trade (if they are considering risk). When trading the USO ETF a trader can trade any amount. The trader does not have to consider contract expiration.

What are The Disadvantages of using the ETF USO?

One of the main disadvantages of using the Oil ETF is a gap in over night positions. The futures market is open all day and night with a small break. That means that the oil market trades night and day. With this type of trading you may get some gaps on overnight positions. If you had an oil position that hit a stop during the night the futures trader could close the position. With the USO ETF the trader would have to wait until the stock market opens to close that position.

Can a trader trade USO Options?

When trading options some things are just not worth it. Options move big in different directions. A Trader might be up 20% one second and down 50% the next on an option trade. This can be fool’s gold. The main problem with some options is the difference in the bid/ask spread. If a stock or ETF does not have much volume usually the options bid/ask is so far apart that just a purchase of that option would put the trader at more than a 10% loss. Then when the trader goes to sell they would lose another 10%. On that trade a person would have to make 21% to just break even. The USO ETF has enough volume that the difference in the bid/ask makes it ok to use to trade options.

Trend Following USO

Oil has been a long time favorite of many big name trend following traders as a small part of their overall trading system. Historically oil and the Oil ETF perform well when used in a trend following system. If you look at the following chart you can see the uptrends that the USO ETF has made in the past.


The next chart shows the downtrend that the USO ETF made from 2014 to current.

Screen Shot 2015-04-20 at 11.48.03 AM

So the USO ETF is a good ETF to use in a trend following model. We currently have a free trading system based on the USO ETF. With trend following it really does not matter if a stock or ETF is going up or down it just needs to move in one direction for an extended period of time.

Leave a Reply