Date: 22-04-2020

On 20-04-2020, I brought 332 shares of USO @ 3.845 (Luckily, a relatively small amount to the whole portfolio). I have sold all of them on 22-04-2020, taking a loss of around USD 376. Reflecting myself in the night, I conclude the following points:

Not staying in my circle of competency.

I don’t know oil market enough when I do the trade, for example, the difference between spot market and future market; what is ETF of crude oil? What is roll-over? What is contango? What is negative rolling yield? I know nearly nothing.

However, I impulsively brought USO, thinking oil cannot be that cheap! It is lower than the cost of production, I said. It is cheaper than Coke! When the economy recovers from Covid-19, the demand of oil will increase and so will price.

I may be right on spot oil, the real stuff. But, I didn’t recognize that I am having exposure to the futures market. And, not knowing the risk involved. I was very dumb by thinking I know something about oil. Looking back, it is quite funny.

Not understanding the vehicle (USO) itself

I haven’t heard of USO before. Basically, what I did is to search Google by “What is the best ETF to buy oil”. How stupid I was! I didn’t ask questions like how it help me gaining exposure in oil; If it holds future, when will they roll-over to the next month?

If I have asked those questions, I would be able to see the pitfalls. This point is basically a specific case of point #1: not staying in my circle of competence.

Afraid of missing an opportunity (Greed)

The main reason for making this impulsive trade was that I was thinking about missing an opportunity. What if the oil goes up tomorrow? The price is so irrational. It should correct itself. Yes, I may be correct for spot oil but not USO which mainly holds near term futures.

Emotion is a big enemy. Risk-averse and it’s opposite: Greed.

The Good Side

Because of this experience, I actually know more about the oil future market. But more importantly, I learned a lesson on staying within my circle of competence. Don’t do anything that I do not fully/ largely understand. Beware of my personal emotion, especially greed.

Leave a Reply

%d bloggers like this: