DCR Net Asset Value Now at Zero

In early April, we pointed out the DCR/UCR trade to Bespoke readers, noting that if oil closed above $111 for three consecutive days, the two notes would hit termination at the end of the quarter at wherever their NAVs were trading. UCR is the "oil up" note and its NAV is calculated by dividing the price of oil by three. DCR is the "oil down" note and it is calculated by subtracting UCR's NAV from 40.

Once oil closed above $111 for three days in a row (seems so long ago), the termination triggered, so at the end of this quarter, the notes will be distributed to holders at their NAVs. But now that oil is trading above $120, DCR has no NAV [40-(120/3)=0]. Surprisingly, DCR's price is still trading at a premium to its NAV, and if oil is above $120 at the end of the quarter, owners will lose all of their money, effectively making it an option play on oil's decline at this point. UCR, on the other hand, will distribute $40 per share if oil is above $120, even though its price is trading at $37.26.

click to enlarge

The image above is from MACROshares' website.

Comments

[Buck Woodford:]

So, if Oil is >120.. say 130.. then DCR is still at zero, but does UCR go to 43.33? or is it capped at $40? there's only so much money in the pot and I can't imagine DCR can go negative to compensate.

just being lazy/quick here and trying for answer before perusing prospectuses.

2008 May 08 04:17 PM

[jjason:]

Why do you call things like DCR and UCR investments? These things should be made illegal. I am constantly amazed at the stupidity of the average American who hasn't a clue on what is a practical and productive investment!

And shame on the people involved in selling this stuff.

2008 May 09 06:04 AM

[Stocks2livebuy:]

Jason,

How else can the average America make a crude oil price play, as easliy as they can in an ETN like this?

2008 May 09 10:41 AM

[nearlybroke:]

I'm an idiot for not researching more thoroughly before jumping into DCR early last week. I kept buying on the way down, hoping to lower my cost basis so I could sell at close to break-even on the first day that it went up at all. Then the bottom dropped out. I'm already down 40% in 3 days.

Now I read that if oil is above 120 on liquidation I will lose the rest of my investment? So this is now ALL the risk of an option without the benefit of the potential upside? Good GOD. Do I get out now or wait and hope that DCR might see $3 again (even briefly) before the end of June?

2008 May 10 12:46 PM

[nearlybroke:]

How is something like this even legal? I guess as long as they post the risks on their website, there will usually be a sucker like me to take the bait?

2008 May 10 12:47 PM

[Eric Fox:]

Last day to trade:

" As a result of a termination event described in the prospectus, today, June 25th, is the last day of exchange trading for UCR and DCR. Holders of record as of June 30th will receive final distribution payments on July 3rd. "

2008 Jun 25 11:13 AM