Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Friday Stock Market CRASH Following Israel Attack on Iranian Nuclear Facilities - 19th Apr 24
All Measures to Combat Global Warming Are Smoke and Mirrors! - 18th Apr 24
Cisco Then vs. Nvidia Now - 18th Apr 24
Is the Biden Administration Trying To Destroy the Dollar? - 18th Apr 24
S&P Stock Market Trend Forecast to Dec 2024 - 16th Apr 24
No Deposit Bonuses: Boost Your Finances - 16th Apr 24
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Futures Contract – Trading Crude Oil With USO

Commodities / Crude Oil May 14, 2022 - 06:22 PM GMT

By: Chris_Vermeulen


Crude oil, like most commodities, is not priced as a single data point like a stock. Instead, commodities, like oil, trade via futures contracts. A futures contract is an agreement to buy or sell a particular commodity or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quantity and quality specifications to facilitate trading on a futures exchange.

Unlike options, futures contracts do not have a time value component in their pricing. Each futures contract is a standalone contract with its own ending date, supply and demand, and market-determined price for the underlying product. Another key difference between options and futures is that while an option gives the holder a right to buy or sell at a specific price, exercising that right is optional. A futures contract is a legal contract for delivering an underlying physical product or, in some cases, a cash equivalent. Futures contract performance is a legally binding agreement and is not optional.

ETF vs. Futures Contracts

Many products that have futures contracts also have Exchange Traded Funds (ETFs) that attempt to approximate the performance of the underlying product. In the case of West Texas Intermediate (WTI) oil, the ETF with the ticker symbol USO is a popular product. Shares of USO trade on a stock exchange rather than a futures exchange.

Owning shares of USO is not the same as owning oil futures contracts. 

USO invests primarily in crude oil futures and other oil-related contracts and may invest in swap contracts. These investments are collateralized by cash, cash equivalents, and US government debt with two years or less maturities.

The objective for USO is for the average daily percentage change in USO’s net asset value (NAV) for any period of 30 successive valuation days to be within plus/minus 10% of the average daily percentage change in the price of the Benchmark Oil Futures Contract over the same period.

While the intent of an ETF like USO is to track the price of oil, there will be tracking variation that could be substantial at times.

An ETF like USO trades continuously, whereas the futures contracts the fund may hold have expiration dates. To facilitate continuity, a fund like USO will sell futures contracts close to their end date and replace those contracts with new contracts that are longer-dated. The futures contracts that USO owns spread out over a range of contract dates.

Why Trade an ETF?

ETFs like USO trade like shares of stock. That structure carries less risk than trading futures contracts directly. And you don’t need a futures account to trade an ETF like USO. You can even trade USO in retirement accounts like IRAs.

Contango and Backwardation

We can visualize the futures term structure or the forward curve by plotting the prices of a series of futures contracts over time. 

When longer-dated contracts are trading at a higher price than the front-month contract, that forward curve is in “contango.”  Alternately, when longer-dated contracts are trading at a lower price than the front-month contract, the forward curve is in “backwardation.” 

The front-month price and the longer-dated price will meet in the middle somewhere as time goes by.  But that does not necessarily mean that oil prices will go down.  Over time, the oil price can go up or down, and the forward curve will adjust.

Physical products like oil are often in contango because of the costs associated with storage and transportation.  These costs are assumed to make oil for future delivery more expensive.  But when near-term supply is constrained, the front-month contracts for sooner delivery can be more expensive, and the forward curve will be in backwardation.

Roll Yield

An ETF like USO is maintained by rolling contracts forward over a 10-day period. The closer in contracts are sold, and farther dated contacts are purchased to replace them.

The gain or loss from completing those rolls creates a roll yield that can be either positive or negative.

Positive roll yield exists when a futures market is in backwardation when short-term contracts trade at a higher price than longer-dated contracts. When the market is in contango, the longer-term contracts are more expensive than short-term contracts, and roll yield will be negative.

Currently, the oil futures curve is in backwardation. The contract for one year away is trading nearly $25 lower than the front-month contract. That implies that supply is tighter now than expected in the future.

Backwardation can provide a bit of a tail-wind to an ETF like USO when the fund managers are selling relatively expensive short-dated contracts and replacing them with lower-price contracts dated further out.


After many years of buying and selling options using a wide variety of strategies ranging from the simple to complex, I find that a simple strategy like selling puts can be one of the easiest to manage and most reliable for generating regular profits.  Don’t make it more complicated than it needs to be!

Sign up for my free trading newsletter so you don’t miss the next opportunity!

Want to learn more about our Options Trading Service?

Every day on Options Trading Signals, we do defined risk trades that protect us from black swan events 24/7. Many may think that is what stop losses are for. Well, remember the markets are only open about 1/3 of the hours in a day. Therefore, a stop loss only protects you for 1/3 of each day. Stocks can gap up or down. With options, you are always protected because we do defined risk in a spread. We cover with multiple legs, which are always on once you own.   

If you are new to trading or have been trading stock but are interested in options, you can find more information at The Technical Traders – Options Trading Signals Service. The head Options Trading Specialist Brian Benson, who has been trading options for almost 20 years, sends out real live trade alerts on actual trades, such as TSLA and NVDA, with real money. Ready to check it out, click here:

Have a great day!

Chris Vermeulen

Chris Vermeulen has been involved in the markets since 1997 and is the founder of Technical Traders Ltd. He is an internationally recognized technical analyst, trader, and is the author of the book: 7 Steps to Win With Logic

Through years of research, trading and helping individual traders around the world. He learned that many traders have great trading ideas, but they lack one thing, they struggle to execute trades in a systematic way for consistent results. Chris helps educate traders with a three-hour video course that can change your trading results for the better.

His mission is to help his clients boost their trading performance while reducing market exposure and portfolio volatility.

He is a regular speaker on, and the FinancialSurvivorNetwork radio shows. Chris was also featured on the cover of AmalgaTrader Magazine, and contributes articles to several leading financial hubs like

Disclaimer: Nothing in this report should be construed as a solicitation to buy or sell any securities mentioned. Technical Traders Ltd., its owners and the author of this report are not registered broker-dealers or financial advisors. Before investing in any securities, you should consult with your financial advisor and a registered broker-dealer. Never make an investment based solely on what you read in an online or printed report, including this report, especially if the investment involves a small, thinly-traded company that isn’t well known. Technical Traders Ltd. and the author of this report has been paid by Cardiff Energy Corp. In addition, the author owns shares of Cardiff Energy Corp. and would also benefit from volume and price appreciation of its stock. The information provided here within should not be construed as a financial analysis but rather as an advertisement. The author’s views and opinions regarding the companies featured in reports are his own views and are based on information that he has researched independently and has received, which the author assumes to be reliable. Technical Traders Ltd. and the author of this report do not guarantee the accuracy, completeness, or usefulness of any content of this report, nor its fitness for any particular purpose. Lastly, the author does not guarantee that any of the companies mentioned in the reports will perform as expected, and any comparisons made to other companies may not be valid or come into effect.

Chris Vermeulen Archive

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in