Selling 1,000 Barrels of Oil / Matthew Davies

The craziest thing I sold recently was 1,000 barrels of oil I didn't have. 24-hours later I was $10,000 richer.

I've been interested in the stock market for a long time and work in securities law. The theory around investing is fascinating and the stock market is so complex that it is essentially impossible to predict.

To borrow a quote:

The Efficient Market Hypothesis essentially says that all known information about investment securities, such as stocks, is already factored into the prices of those securities. Therefore, assuming this is true, no amount of analysis can give an investor an edge over other investors, collectively known as "the market."  

The question, therefore, is whether any investment decision other than buying “the market” is truly rational. Do I really know something more than other investors? Do I understand a stock or concept better than people who do nothing but research these topics all day long?

There are tens of thousands of highly paid and very smart people doing nothing but looking for ways to make money from the stock market every second of the day. What do I know?

To understand how you can sell 1,000 barrels of oil you don't own, you have to understand futures contracts. In finance, a futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future.

Anyway, the night I decided to sell 1,000 barrels of oil was the day that oil crashed and “sold” for a negative dollar-figure. If you were scheduled to receive delivery of a barrel of oil on that specific date, no one wanted it to the point that you had to pay someone to take if off your hands.

Seeing all this, I thought that if the price of a barrel of oil was $0 on that day because there was more oil than people wanted, it was likely to be $0 in a month as well. But how to leverage this half-baked notion?

Futures markets don't close, so at 10 p.m. that night I entered into a contract in which I promised to deliver 1,000 barrels or real physical oil to the buyer in exactly one month. I did not have 1,000 barrels of oil, but I only needed to have them in a month when I promised to deliver them. My bank was willing to let me take that risk. All I needed to do was buy the rights to a 1,000 barrels of oil in the intervening month.

Well, I sold those 1,000 barrels of oil at 10 p.m. on a Monday night for for $22 each. By 3 in the afternoon the next day, I was able to buy the rights to 1,000 barrels of oil back for $11 each. I made $10 on each of the 1,000 barrels of oil I sold. A cool $10,000.

The question is though, was I smart or did I get lucky? No way to know.