alt Hacker NewsIn 2020 some Oil futures were negative at close, which has one obvious effect (if you're stuck holding the bag you're paying to store all this oil despite it being, at least temporarily, worthless) but also messes up the ETFs.
Suppose my actual oil futures go from $800k to $900k, the ideal ETF is trying to ensure that $800k also turns into $900k just as if its investors were in actual oil futures. But these aren't futures and don't result in delivery - so critically when real oil futures blow up and that $900k turns into -$1M because the global economy had a heart attack the ETF cannot be worth -$1M as it's just paper and I don't have to pay you one cent.
For the ETFs this means a negative exposure for the operator - they're eating unlimited downside but can't pass that on to their customers, and for a blip like 2020 that's survivable (if you're well capitalised) but longer term it would be fatal.
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i figured these ETF providers have to have sufficient capital in reserve to allow for it perhaps? I mean, how does it work if they defaulted on those options by not being able to take delivery? Who pays?
> which has one obvious effect (if you're stuck holding the bag you're paying to store all this oil despite it being, at least temporarily, worthless)
Isn't it the other way around? Because you would be stuck holding the bag the prices went negative?
It's also a head-ache for options traders because some options models (black scholes) have log-normal pricing baked in which don't actually allow for the underlying asset to go negative. So nevermind worrying about taking delivery, your HFT options desk just had their algo blow up.