Sharing Some Recent Experiences and Insights on Participating in Crude Oil LOF

In LOF and ETF investments, the premium rate is the key indicator that determines trading logic, risk, and return. Different levels of premiums have vastly different trend characteristics and operational strategies. Based on practical experience with crude oil-related LOFs, I have gained deeper insights into managing these products and summarized practical tips suited for different risk preferences.

1. Premium Levels: High premiums are like speculative stocks, low premiums resemble inactive stocks

The difference between the on-market price and the net asset value (NAV) of LOFs/ETFs creates the premium. The level of the premium directly influences the product’s trend characteristics:

• High-premium LOFs/ETFs: Comparable to speculative stocks, highly volatile with maximum elasticity High-premium products’ movements are completely detached from their NAV fluctuations, driven strongly by market sentiment and capital speculation, resulting in explosive trends. For example, with crude oil LOFs, when market sentiment heats up and premiums are rapidly driven higher by funds, these LOFs can exhibit short-term counter-trend rallies. Even if international oil prices fluctuate slightly, their on-market prices can continue to surge, showing clear signs of collective speculation. While this can generate significant profits, risks also soar—any misstep can lead to rapid premium contraction and sharp declines.
• Low-premium LOFs/ETFs: Similar to inactive stocks, stable with limited elasticity Low-premium products tend to track their NAV closely, with minimal speculation, small fluctuations, and steady trends. They do not experience sudden surges or crashes. During periods when high-premium LOFs are soaring, low-premium crude oil LOFs often remain flat or even fall into negative premium territory due to capital outflows or low market attention. These products are more stable, with no significant risk of large declines, but their growth is slow, and returns are limited—hard to achieve extraordinary gains.

2. Matching risk and return: Choose high or low premium based on your risk appetite

Investing in LOF/ETF premiums requires understanding risk and return, aligning with your trading style. There’s no absolute good or bad—only what suits you.

(1) Pursuing high returns and willing to gamble: Focus on high-premium LOFs

To earn excess returns, you must accept high volatility and risk associated with high-premium products. Their elasticity is unmatched, capable of rapid surges during market rallies, offering attractive short-term gains. However, these products lack safety margins; once speculative enthusiasm wanes and premiums fall, they can experience swift declines with large drawdowns. Suitable for investors with strong risk tolerance, skilled in short-term trading, and able to strictly cut losses. Operations should closely monitor market sentiment and capital flows, with quick entries and exits—avoid holding for the long term.

(2) Seeking stability and avoiding volatility: Stick to low-premium LOFs

If you prefer steady growth and want to avoid large setbacks, low-premium LOFs are the best choice. Their movements closely follow NAV, with minimal speculation, making them more stable. You don’t need to watch the market constantly or worry about sudden large losses. However, it’s important to accept their slower growth and lower yields—stability comes from high elasticity and low risk. Ideal for investors with weaker risk tolerance, medium- to long-term holdings, and a focus on stable income.

3. Arbitrage opportunities for low-risk investors: High-premium positioning in extreme market conditions

Low-risk investors are not completely excluded from gains in high-premium products. Extreme downturns are excellent entry points—they help avoid high-position risks and allow capturing premium recovery profits. When high-premium LOFs decline due to waning sentiment and capital outflows, and premiums fall below 10%, bubbles are significantly squeezed, and safety margins improve. Entering at this stage carries much lower risk than chasing high prices. If market sentiment recovers later, premium restoration can yield good returns.

On March 10, I seized such an opportunity by heavily buying South China crude oil LOFs, when their premiums had fallen to reasonable levels and risks were manageable. However, this also taught me a lesson: due to caution, I sold most holdings after just two days and switched to global crude oil LOFs, missing out on subsequent gains of over 30%. This made me realize that after low-risk entry into high-premium products, it’s crucial to judge the continuation of the trend rationally and avoid premature profit-taking, which could cause missing the main rally.

4. End-of-market signals: From premium warnings to temporary halts, beware of tail-end trends

A true market top does not happen without warning. Based on practical experience with silver and crude oil LOFs, several clear signals indicate the approaching end of a major trend, ranked by risk warning level:

1. Premium risk alert: When fund companies issue notices warning of excessive deviation between on-market prices and NAV, it’s the first warning—indicating bubble concerns and that the market is entering its late stage.

2. 10:30 trading halt for verification: A temporary halt during trading signals that speculation is easing, and the risk of chasing high prices is increasing.

3. Intraday temporary suspension: The most critical signal—when a halt occurs, it often marks the tail end of the trend. Market sentiment is strongly exiting, and a significant premium contraction and price drop are likely. Regardless of profit or loss, it’s crucial to exit decisively and avoid greed for the last wave of gains.

4. Practical summary and reflection

5. Adjust your mindset, avoid greed: High returns come with high risks; low, steady returns come with low risk. Don’t expect to enjoy the safety of low premiums while also chasing high premiums for quick gains. Choose your direction based on your risk capacity and avoid blindly following the crowd.

6. Seize opportunities in extreme markets, avoid chasing highs: Low-risk investors should wait for premiums to fall before entering high-premium products. Never chase high prices to avoid being caught at the top.

7. Master stop-loss and take-profit: For short-term trading of high-premium products, set strict stop-loss levels to prevent large losses. For low-premium entries, judge the trend’s continuation and avoid premature profit-taking.

8. Pay close attention to warning signals and respect the market: Premium warnings, suspensions, and other signals are risk alerts from the market. Take them seriously, exit timely, and protect your gains.

Investing in LOF/ETF premiums is fundamentally a battle between sentiment and value. Only by understanding product attributes, matching your style, and recognizing market signals can you seize profits amid volatility and avoid risks. This is the core operational insight gained from practical experience.