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2/3/4.../n X Leveraged Strategy : Weapons of Wealth Destruction or Creation - Attempt at DIY Primer

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January 18, 2009 – Comments (34) | RELATED TICKERS: FAZ , SKF , ERX

Greetings for 2009 fools!

I have stayed away from blogging myself –although I am very active in responding on others  and also having ongoing discussions in the Stinkyfeet board. Also I keep pestering the fool often with discrepancies as and when I come across them at the fool. Eg:

(1)    Cost basis adjustments and score adjustments for Rydex Inverse ETF distributions: By my reckoning the distribution ( akin to a dividend) formula used by the fool in these cases was incorrect

(2)    DVGL.OB, JADA.OB  Price allocation: The fool did not receive price quotes on a lot of Bulletin and Pink Sheet stocks – and thus a lot of us didn’t receive the correct price. JADA.OB had sub 1.50 close on Thursday – would have allowed a lot of us to get out .

(3)    NCTY:  A lot of fools are showing 400+ points garnered on this pick in 2008 with a $100+ quoted price – which don’t show up anywhere else.

Anyway I digress. The point of the Leveraged ETFs are increasingly becoming important as their popularity increases – both here in the Fool and outside I am sure. The issue has definitely become magnified with the introduction of the Direxion 3x ETFs.

I am surely missing a few but here’s a good compilation of comments on the fool:

(1)    Tasty’s  excellent and if I am not mistaken the first post on this subject in the Fool : HERE

(2)    Kcanant’s post on DXO ( This is the 2x Leveraged ETN on oil): 

(3)    My Bear pitch on DXO and my rationale:  HERE

(4)    David’s recent post on the Leveraged ETFs ( which really triggered this post and hotrods1431 query on ERX ( although he said ERZ) ) :  HERE

 

No Denying the Danger
======================

I have actually used the phrase “Weapons of Wealth Destruction” against these ETFs.  A lot of fools have realized their peril ( included: GMX – who is a timer and plays it well but acknowledges the problem in my DXO bear pitch, FB – who has redthumbed ALL simultaneously, incidentally here was a nice idea from ReaganD on this very topic : Dex …I think the list goes on)

            Abit in the latest post by David quoted above says: “These leveraged ETFs should be considered as derivatives and are dangerous like derivatives”. There’s a small correction : THEY ARE DERIVATIVES , hence are AS DANGEROUS as derivatives. Ie for commonfolk that means Options.

And of course with Options: you risk only capital where you are ready to loose 100% ALL THE TIME. This is of course true of a lot of stocks in this meltdown .

Basics of Leverage
======================

I think most of the people know what this is : the simplest example is the Home Loan Mortgage: You typically have 10% down payment – the bank lends you 90% and you own the house – well that is a 10: 1 leveraged transaction (10x) – you gain/loose 10 times of each 1% movement of the house.

Lets turn it around and look at it from an investor standpoint. Lets say what would be an easy run-of-the-mill way for an investor who owns his house “clean & clear” and wants to invest/speculate in real estate – and lets say the bank A.  agrees to loan 100% of the value of his house – he can then easily buy “clean & clear” a house similar to his own and thus create a 2x leverage or of course he can go to 10 banks and do a 10% downpayment on 10 similar houses and thus be borrowed and doomed to the hilt. ( You say cant’ happen in real life – well you know what I say!)

Well that’s how it works in real-estate and in most physical markets , the issue of course is – by buying the 10 houses – the investor is bound to increase demand/supply imbalance and has to pay a little more with each transaction. This is really what stops Fundhouses from playing this the old way . If you had a 2x Exxon ETF : They can easily try borrow against your money and buy 2 shares for every 1 share of XOM you funded -  but that would move XOM big time. Also there’s the problem of not many people will lend 100% against a XOM share. Additionally, these Leveraged ETFs are based on indexes , making this impossible to execute on all underlying scrips of the index.

So in comes Index futures,swaps,cash, treasuries. Basically using a blend of these 4 instruments ( 2 of which are Derivatives) you can create almost all “n”x leverages within rational bounds! And the great thing is notionally they do not move the underlying – but of course demand/supply has to affect something  - and in this case , it’s a nice little thing called “Volatility Premium” which drives the price of the derivative itself. But there’s so much beauty ( ahh! Hmm! Cough! Splutter!) in these – since most of them are priced under sophisticated variants of the Black-Scholes model , the “Implied Volatility” which is what is actually used to price – can’t really diverge too much from the “Actual Volatility” displayed by the stock.

Thus for eg  on GS  Pitch by: d1david 10/31/08 3:54 PM

Reply | Rec This (Recs: 2) | Report this post

they just opened front month puts in the teens... sounds like Bear Stearns

The people who did that profited huge from something like this (10-20x) – because GS was still at $90+ and although “actual volatility” had climbed – it never would have priced in an “implied volatility” of seeing GS at $48 on Nov 21st. ( There are a lot of subliminal messages here – which I won’t elaborate, but you should understand at least why I follow the people I follow – David had an outstanding call)

 

  DIY : Have I gone mad? – Grandma’s Option Strategy , if it ever can be
===========================================================

All right if you have made it till here, I am actually going to walk thru some examples of how to implement a 2x strategy yourself – which I hope should give you enough insight to make a call on what course of action you want to take:

Derivative/Option Pricing = Underlying Stock/Index  price + Implied Volatility Premium + Time Value Premium + other ( very minor, things like dividend yield etc)

Lets go back  to the XOM 2x example.  It is good because Exxon is an extremely liquid stock as well an option. Lots change hands – Bid/Ask spreads are small (This is extremely critical from a DIY perspective)

As of Friday’s close XOM was at 78.10 with a movement of $1.44 for a % change of 1.88%. In order to implement a 2x ( say Long) strategy: You need to look at Calls expiring nearest month ( which is Feb) and see at which strike do you get a 2x price movement  ie called the Option Delta

Delta % = % of option price change/ Stock Price change – looking for a value of 2.

This happened on Friday on the FEB 40 XOM CALL. Let me say that again the 40 call – when XOM is at $78+! People like GMX who are active Option traders are going to laugh their guts out. Volume on this strike was close to non-existent – well this is truly a Grandma’s Option strategy, what chance does XOM have of  ending up below $40 in Feb for you to loose 100% on this?

But lets turn this around and ask how did FAZ or SKF ( the 3x and 2x Bears) which were at about $200 and $300 on Nov 20/21 end up at $30 and $100 in Dec/Jan?

The issue is duration – or in some sense buy/sell. See if you buy this XOM call now  - You are almost GURANTEED to be assigned in Feb ie you have to fork up the money to buy the underlying stock – so lets say you bought  1 call : Cost of  38.20x100 ( each call =100 shares)=$3820  instead of buying  about 50 shares of XOM ( There’s your 2x leverage) . But if that’s all your capital is – you have to sell sometime before expiry to avoid forking up the extra $40x100=$4000 to buy up the actual shares.

Ie Net investment = 3820+ 4000= 7820 for 100 XOM. Whether you make money is dependent on obviously where XOM ends up.

There’s another problem , this 2x or Delta %=2 is  valid ONLY on price action as of Friday. With time ie everyday the “Implied Volatility” and of course the price will change and so will the Delta. Thus in order to assure the buyer the constant 2x/3x – the funds have to deploy a DAILY REBALANCE – by trading in and out of these and changing the mix between the derivative, cash and treasuries. Eg  Lets take   this strategy

The $60 strike has a Delta % =4 so by investing  in 1 60 call for $18.40x100=1840, and keeping the rest of
$3820-1840=1980 you could try to mimic the above strategy ( actually not since the price is not exactly half – its cheaper, due to Implied Volatility premium – but its close to 2x, actually 1.93x).

This is not a sedentary strategy anymore – because its somewhat closer to the $78 price – and this Delta% WILL MOVE quickly based on the underlying. So to maintain a constant leverage – you’ll have to move strike prices accordingly.

Liquidity:  The highest volume was experienced in the 75,80,85 strikes. Not at the ones I mentioned. Thus for a fund – you know where they have to play.

I hope some of the problems of these ETFs are becoming clearer.

Thus specifically for the inverse Financial ETFs – I am going to use the XLF , a 2x Inverse strategy  could involve buying the 14 Feb put which appx has the 2 Delta %  and costs $4.50 when XLF was at $9.68 Friday. The Implied Volatility is 95.2 when VIX today is at 46. I distinctly remember some 200 Volatility in the 90 VIX days.

Lets compute the volatility premium  on this Put: its basically 4.50- (14-9.68)=.18 and that translates to about 4% ….I am pretty sure on Nov 21st it would have priced around 2.5x

Thus on Nov 21st when XLF was at 9.40 the 14 DEC PUT ( I am guessing)  would have cost = (14-9.40 Intrinsic)  + 10% premium = $5.00 appx.

On Dec 19th ( expiry)  XLF was at 12.2 and VIX was at 44 – which actually would have made the puts around 1.80 ( no time left – so intrinsic only) = LOSS= (5 -1.8)/5=64% which incidentally was the same movement in SKF.

 

WHEW! THAT WAS LONG!

So ETF ISSUES/ADVANTAGES.

ISSUES

(1)    They are almost worthless as a long-term Hedge/Long Investment strategy

(2)    They are akin to buying/selling  IN-THE-MONEY OPTIONS on a daily basis

ADVANTAGE

(1)    They do the Buy/Sell for you

(2)    Hence, Great trading tools

 

So DIY PROS/CONS

Pros:

(1)    You can do it and avoid the daily BUY/SELL.

(2)    You can spread out the Expiry by doing what’s called a CALENDAR SPREAD ( Great for a Low-Leverage long term strategy)

(3)    Would you have bought  XLF Puts on Nov 21st…most likely you bought SKF in Sept when the LEH/AIG Crisis hit….SKF was around 120 then ….lets see what the puts would have done

If you bought the Oct and Dec puts when XLF hit 19 on Sep 16th ….with Volatility still in the 30s the strike would have been 25…that means possibly a price of about $6.20 for Oct and around $6.40 for Dec and held thru and sold on open market on day of expiry:

Transaction 1: Oct Put on Oct 17th with XLF at around $15 = for $10 and
Transaction 2: Dec Put on Dec 19th with XLF at around $12.50 = for 12.50

Thus your return = ( 10+12.50-12.30)/12.30= 83% while XLF movement= -36%. SEE THE POINT ABOUT NON-CONSTANT Leverage.  You would have made a little bit over 2x.

CONS:

When to Buy/Sell: Basically if you have a long term strategy you will need to roll-over ( ie move the expiry by buying farther out) .

LONG TERM STRATEGY for ERX ( Ie Energy Bull)
===========================================

Hotrod..... Wanted to reply in David’s post but here goes:

Your underlying scrips should be IYE,OIH,USO.The last 2 have Options all the way in the LEAPS.Choose your mix. Use OIH and USO leaps and maybe IYE near-term (3 months) and roll-over everytime on the IYE. Would beat ERX hands down.

34 Comments – Post Your Own

#1) On January 18, 2009 at 10:33 PM, anchak (99.86) wrote:

Some caveats/disclaimers:

(1) This is an extremely dangerous strategy. Its possible to loose 100% of your capital in this . You need to have a sane/trailing stop/stop loss strategy for that not to happen

(2) I did not pay any attention to costs. IT WOULD BE ENORMOUS - Options are very costly to trade - making a break-even inclusive of costs - to require  a minimum prinicpal - which you would be willing to loose 100%.

(3) If the  trend is undirectional or monotonic as mathematicians like to say - this is redundant - the Direxion funds would outperform.

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#2) On January 18, 2009 at 10:44 PM, d1david (29.32) wrote:

thanks for the post.  one more error on caps is some the symbol SAY... caps it didn't trade in the 8 or 9 range on 1/8/09 , yet it got shorted and easy points scored.

 

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#3) On January 19, 2009 at 12:32 AM, ReaganD (30.72) wrote:

great post!  people need to understand the dangers of levered ETFs

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#4) On January 19, 2009 at 12:37 AM, ReaganD (30.72) wrote:

great post!  people need to understand the dangers of levered ETFs

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#5) On January 19, 2009 at 3:02 AM, gman444 (29.03) wrote:

Thanks Anchak,

Getting into the nuts and bolts as you have is very helpful indeed; I suspect this is true for most, if not all of us.  You also mentioned the pros involved which most others have not, and these are very important.  It is good to appreciate how risky these vehicles are, but also when they can be beneficial---if the market is going relatively straight up or down, they can be very profitable.  Your explanations and example of the Calendar Spread are terrific.  Great post. 

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#6) On January 19, 2009 at 8:43 AM, binve (< 20) wrote:

anchak, fantastic post! I agree 100% with gman, detailed explanations of how these instuments try to simulate 2x-3x daily movement is very useful and educational. And this is the substantiation behind the warning that most of us have been giving "these are great as short term trading vehicles, these are bad/dangerous as long term investments". When you spread the knowledge about how these things work, the community will know how to use them properly. Thanks!

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#7) On January 19, 2009 at 11:13 AM, anchak (99.86) wrote:

Thanks guys for all the comments!

There's the scary...but really if you only want a 2x leveraged strategy.....I think the alternative is viable - except it can be Capital INTENSIVE....because Deep In-The-Money options means you  will be assigned - unless you trade out beforehand.

 d1david

David....I noticed that....actually I played it myself shorted SAY....on the day....then closed it out when it didn't trade. And lo and behold the day it opens ( like sub $1.20) - CAPS allows a $9+ starting price. Complained to them!

ReaganD

I agree....your idea is being implemented by a few in Caps. RVA just started a profile apparently doing this called "Ultrasuck"

Check out his blog

gman444

Gman....Thanks! My point is - if someone is dead set on an idea. A lot of us are actually - and its 3 letters OIL. A leveraged long OIL strategy is something worth considering - which is why I thought about Hotrods question and this led to the post.

binve...my friend always good to hear from you. Appreciated.

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#8) On January 19, 2009 at 11:29 AM, Alex1963 (28.82) wrote:

Wish I'd read this before I tried my 1st play on ETFs with SKF last week and got priced out before I even blinked. Live, (pay) and learn!

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#9) On January 19, 2009 at 11:46 AM, anchak (99.86) wrote:

 Alex1963....

Unfortunately....that's been the journey for a lot of us in 2008.

Also something else which I have mentioned in other comments on the Fool....but forgot here in this post....

There's a distinction in the Strategy that these Fundhouses are adopting in implementing these products:

Proshares - ie SKF,DIG,SRS etc....They employ SWAPS - ie its in OTC ( unlisted) transaction with an approved counterparty - eg Goldman , JPM,Deustche etc.....So there's counterparty risk.... think about this if you played SKF and LEH was your SOLE counterparty - where would you have to go to collect your windfall? ( remember Rainmaker)

Direxion: Not sure but from their disclosures they are using Index Futures - these are not OTC but cleared I think thru the Chicago Board - lesser counterparty risk.

 

On the COMMODITY LEVERAGED FUNDS:

ETNS:  DXO etc.... Absolute NO-NO. Why? YOU take the Counterparty risk directly. ETNs - by design are counterparty products - so before investing in an ETN - research your Paymaster - ie counterparty

ETFs: Proshares - theirs are all ETFs - I have not looked how they are deploying these. If they chose the futures - at least clearer from that perspective.

 

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#10) On January 19, 2009 at 12:08 PM, kamuirei (< 20) wrote:

Remember the Lehman ETNs...

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#11) On January 19, 2009 at 6:15 PM, TigerPack1 (88.11) wrote:

The CAPS game is "scored" with many mistakes every day.

My biggest gripe, is how the games OVERLY rewards short sellers and thumbs down picks.  It is not very realistic.

If I short a stock and it FALLS 20% in the real world, while the average S&P 500 number RISES 20%, I have only matched the real world return most investors are making.

However, CAPS gives you a number as if you have OUTPERFORMED the average investment by 40%, instead of only replicating it!!!

What sense does that make???  That's why all the Top Fools always have been and always will be people that use thumbs down and underperforms as their strategy.

This game surely DOES NOT reward the best stock pickers, but those that play the game the way the rules and points are set out.

-TigerPack

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#12) On January 19, 2009 at 6:21 PM, TigerPack1 (88.11) wrote:

If CAPS scored underperforms more in line with the real world, and added a third category of gain per pick, the leader board would be very different indeed.

I would rather follow someone that made 100 picks, each "truly" outperforming by an average of 20%, than someone who makes thousands of picks that randomly outpeform by 5%-6% and are locked-in a few weeks later!!!!  I figure you can get 1000s of points each year and a 65% accuracy number simply by rolling over gains each 5-10 days and reinvesting in new stocks RANDOMLY.  MANY ON THE CURRENT "LEADER" BOARD HAVE DONE JUST THAT!

-TigerPack

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#13) On January 19, 2009 at 6:49 PM, Tastylunch (29.40) wrote:

Anchak

wow man I don't have anything  material to add (thanks for the linkage btw).

I think you just wrote the comprehensive CAPS guide to ETFS. Your caution about ETNs is one people should heed. I will trade the ETNs but only in very very short term, which si why I dont usually  pick thme min CAPS. 7 days is a bit much for them I think in many cases. This is definitely post of the day, probably post of the month here in CAPS!

you don't blog often man but when you do, man are they good.

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#14) On January 19, 2009 at 8:02 PM, madcowmonkey (< 20) wrote:

That is how those work:)

If my strategies were different, I wouldn't mind using the ETF's in a bear market rally that I had the notion ahead of time to watch. My main gripe with this stuff is the leverage and some of the inconsistant returns that I have seen from these in the past. They may work well for Capsters, but I doubt too many people really hold on to them in RL like some do here. That would be a real MF'er.

Good timing on your post too. I think these 3 x leveraged funds are really pulling the wool over the eye of some investors. I just really doubt there returns. I really doubt the 2 x returns too. I guess this would be one area I am a pessimist for an investor to put there money.  

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#15) On January 19, 2009 at 8:11 PM, anchak (99.86) wrote:

Tasty....Thanks man for the kind words. You know I have been pretty worked up with this Leveraged ETF thing.... and Hotrod's comment on David's blog ...sort of got my antenna's tingling....because the issue is he/she is trying to be contrarian in approach and seeking Long-Term Value from an instrument ( ERX-3x Energy Bull) which may very well leave them a pauper!

My point was to portray a viable alternative.

TigerPack:  Thanks for the reply - I guess you needed to vent. But it really had nothing to do with Leveraged ETF strategies. Hopefully your coming replies would be more constructive

What you are pointing to is basically an ABSOLUTE RETURN measure ( where actual % gain/loss counts) against the RELATIVE RETURN metric adopted here at the Fool. 

The first one is truly reflective in Up/Down markets especially Bears such as this. While the 2nd one is what people live by in Bull markets - also the entire Mutual Fund industry.

Please keep in mind why the Fool started the CAPS community - their objective was to enhance their Stock picking/Investment services - which till now were all aimed at an S&P-Enhanced strategy. And now they are proposing a Long/Short Fund.We play the game because of the community - but really did you expect the MF to give away everything for free?

Incidentally, I have mulled many times writing to the fool about their Average Score measure - to have one computed on an Absolute basis - and possibly have a weightage on the score. I am sure many feel the same way.

I did look at your profile...and saw that you had a great timing call - where you closed all your CAPS picks in Sept and started back with a Bull profile in Oct. Clearly you seem to know your stuff - given your absolute return advocacy - may I suggest you close your Underperform picks of the Ultrashort ETFs ....:) :)

 

 

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#16) On January 19, 2009 at 8:29 PM, anchak (99.86) wrote:

Madcow.... I sure hope they do....actually I am pretty sure about it :) :)

One thing actually people may be missing from this post - I defintely do not like the Leveraged ETFs - and they ALL share the same underlying problem...irrespective of X times ( even the 1x ones)

I really wanted to show a viable Real Life strategy of executing a 2x/3x leveraged strategy by doing DIY -its not that complicated.
Of course execution accuracy depends on a multitude of factors like liquidity, calendar spread availability etc. But ITS DOABLE.

If I may draw an analogy ( its a little docile one compared to this Fire-Brand strategy) :

Its like switching from a High Turnover Mutual Fund which trades its entire portfolio in a month to one which has a Holding period of 12+ months.

These ETFs due to their promise of DAILY 1x/2x/3x returns - always have to play this moving target game by rebalancing and churning and moving strikes to "Optimize the Option/Derivative Delta" thus cause some these divergence issues

 

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#17) On January 19, 2009 at 9:26 PM, TigerPack1 (88.11) wrote:

Why would I cover the "underperforms" on the ultra-shorts, when thy will earn me between 50 and 100 points each in the CAPS "game" with the major bull upmove that is approaching?

I can easily argue that the double and triple leverage ETFs provide the "best" way to leverage an investment in an index for IRAs and limited choice investment accounts (not allowing options or margin).

I own DDM (Double Long the Dow 30), DYY (Double Long a Commodity Index) and UYG (Double Long Financials) in the real world currently in several Roth IRAs.  I expect to double or triple my investment dollars in each during 2009, as my indicators are calling for a 30%-40% RISE in stocks generally during the year.

The way they are structured, with stock, derivative, swap and futures ownership, many of the long products collect dividends and interest on the money invested, while retaining the long exposure of 2 or 3 times, WITHOUT the interest expense of a margin account or the high rate of trading commissions out of an individual's account total.  When used in a non-taxable brokerage account, even the capital gains and distributions will not be taxed, so they are not something to consider either in long-term real world performance comparisons.

For example, the DDM pays a solid 2%-3% annual dividend, as the costs of the fund are more than covered by the interest on cash (held to back the futures holdings) and dividends on stocks owned.  If I margined the individual companies in my name, I would pay significant trading costs for 30 stocks, plus 5%-8% yearly in margin interest on half the investment to my broker.

The downside is limited to counterparty risk for the derivatives (which seems higher today than under normal circumstances) and the "premium" prices paid for the futures contracts vs. the current stock prices.

If we are entering a new bull market that lasts 3-5 years, and they perform as I am expecting, these ETFs may provide the best diversified "index" upside of any other product available today in my non-taxable growth accounts.  Plus, they offer considerably better trading flexibility than a once a day trade decision for a regular mutual fund.

-TigerPack

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#18) On January 19, 2009 at 10:29 PM, anchak (99.86) wrote:

TigerPack: Well you shouldn't ...ie close the picks ....but then you shouldn't complain about it either for others deploying it.

On the rest - I will say all the best with your strategy! The truth is I would consider these a tad adventerous for a Roth IRA - but then again that's my personal preference.

The issue I think you are missing in this - which is what we( at least a few of us) are worried about in the Fool is the divergence of the Leverages ETFs (1x/2x/3x - especially with the recent experience of the Ultrashorts) from the underlying index - due to the "Daily Rebalance" effect that I mentioned.

You make good points about costs vis-a-vis any alternative strategy - the margining is the obvious and straightforward way of  gaining leverage ( it limits you however to the margined amount and thus your leverage - I would guess <2x).

Obviously, if you are restricted to an IRA type non-taxable vehicle and you want leverage - for better or worse you will need to do with the Leveraged UltraLongs. There's not much choice I think.

However, of the 3 instruments mentioned I would really be worried about UYG and DYY. The strategy you have WILL BEAR FRUIT - if as you say the markets went straight UP further another 30-40%.

In a unidirectional/monotonic movement - there's no beating these Ultras - infact the alternative Calendar Spread strategy I advocated will UNDERPERFORM. Because with Leverage if its going your way - the best strategy is DAILY/REGULAR ROLLOVER. Kinda buying/selling and reploughing your proceeds in houses in Vegas during the height of the bubble instead of say holding your house and selling at the peak - ie 1 transaction.

However, what happens it doesn't happen like that. What happens if S&P goes to 900+ and then drops all the way back to 650( D1davids prediction) and then maybe by Q1 2010 is at 1000 again?

Well that would be a 10% net gain, but the intervening 30% downtrend - possibly about 40-45% on the Financials - would bring UYG to sub $1 ( 90% down)  - when we expect mass liquidations - which would basically kill the ETF. Thus the following 60% up trend - possibly would salvage the ETF to maybe $3 - still down 25% from where it is today. This is hypothetical - but directionally correct.

Of course, if you are correct and we are in a NEW SECULAR BULL - this discussion is redundant. But then again - all risk evaluations are when you BELIEVE 100% in a hypothesis

 

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#19) On January 20, 2009 at 10:08 AM, EverydayInvestor (< 20) wrote:

anchak - brilliant post, as usual. In a volatile environment these leveraged ETFs should underperform their benchmarks, as you say. So what happens if you short both an ultralong and an ultrashort? Should that not be profitable?

I am trying to get my mind around the actual exposure of such a strategy. In that case you are market neutral, and neutral to a lot of other things. The good thing is you are short the costs of implementing the strategies. Are you essentially long Vega in that case?

I backtested this strategy over the last month with  multiple leveraged ETF pairs and it looks promising. This is more of an academic exercise than a viable trading strategy. I am actually doing this with a small sum of money in TNA / TZA.

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#20) On January 20, 2009 at 10:56 AM, anchak (99.86) wrote:

Michael.... In order for this to work - it needs to be a "Vega" based strategy ie in Options....

Thats' what ReaganD's query also was about.

If you think about something - would you be kind enough to let me know - of course the cost/execution hurdles may still be there for me.

Also I know you recommended Scottrade.....are they good for Options....I am looking for a cheap but good Options broker

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#21) On January 20, 2009 at 11:35 AM, EverydayInvestor (< 20) wrote:

I use Interactive Brokers -- they are cheap for stocks, not bad for options -- there are cheaper ones out there.

How are you talking about using options? Buying puts on both or writing calls? If you are buying puts then you are paying up for the same Theta/Vega that is what costs the leveraged ETFs so much. And writing naked calls, even if you are delta-hedged, just scares me.

Why wouldn't a hedged position in the underlying work?

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#22) On January 20, 2009 at 12:59 PM, anchak (99.86) wrote:

I really need to think thru this....and yes the Put strategy will possibly not work.....

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#23) On January 22, 2009 at 3:50 PM, EverydayInvestor (< 20) wrote:

point moot for me now ... none of the 3x levered ETFs are shortable at my broker anymore.

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#24) On January 22, 2009 at 4:15 PM, Tastylunch (29.40) wrote:

EverydayInvestor

weird wonder why, Are all the borrows out or did IB change their rules?

 

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#25) On January 23, 2009 at 2:24 PM, darroj (28.96) wrote:

Thanks for all the information, anchak et al!

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#26) On January 27, 2009 at 4:10 PM, anchak (99.86) wrote:

What an unmitigated disaster:

FYI EverydayInvestor has a paired short strategy in his CAPS profile here's the latest on the Financials 3xs

01/20/09 FAS 5Y $11.29$9.39
(+8.58%)-15.94%+0.64%+16.58

01/20/09 FAZ 5Y $70.34$57.94
(-7.93%)-18.52%+0.57%+19.09

The 3x Bear is down 18.5% while the 3x Bull is down 15.9%

 

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#27) On January 27, 2009 at 4:23 PM, Tastylunch (29.40) wrote:

LOL that's great. There should be the beginning of the end of  that triple ETF nonsense.

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#28) On January 27, 2009 at 5:36 PM, ColoCdn (< 20) wrote:

Anchak,

Thanks for the post; all good stuff there.  Anyone venturing into these WWDs without doing some homework and serious risk management planning will probably get burned.

While I've managed to make some good money trading them the past few weeks (specifically UCO against SCO), they are tricky beasts that require monitoring by the minute.  My advice if you chose to trade them: be patient and wait for the fat pitch, be prepared to get stopped out early if you're trying to lose less than 10%, and most importantly, hold overnight at your own risk!

ColoCdn

 

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#29) On January 27, 2009 at 7:03 PM, anchak (99.86) wrote:

Tasty....it saddens me...especially since these are packaged for "investors". A lot of us have bought these as hedges - against core longs and been burned.

ColoCdn: Man now you got my attention - when you say UCO against SCO - you meant you joint shorted in RL. If so, can you point as to which broker etc. The only person in CAPS who acknowledged trying to do that was Michael(Everyday) and he was forced to cover his TNA/TZA ( he uses IBKR mainly).

You are right of course in your comment!

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#30) On January 28, 2009 at 12:48 AM, ColoCdn (< 20) wrote:

Anchak, sorry I wasn't clear...

When I said I've been playing UCO and SCO against each other, I meant buying UCO on a dip while simutaneously selling SCO on the pop and vise versa.  There's been a few nice +15% moves up and down on these things in the past weeks.  Crude's current lack of direction one way or another has definitely made these a good January trade.

And that's the other catch 22 with these leveraged beasts; yes they're inherently volatile, but I've found they're really only good for a trade when sector volatility is also high.  If you get on the wrong side of a trade when things calm down, you might be waiting awhile to get your money back out.  Chart SRS for the past 3 months as an example.

Anyway once UCO / USO start looking anything like the SRS chart I'll be long crude and waiting patiently for $4 gas.  In the mean time it makes the wife happy when I can earn some extra grocery money... ;-)

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#31) On January 28, 2009 at 3:07 PM, EverydayInvestor (< 20) wrote:

FYI, IB now shows MWN/MWJ TNA/TZA BGU/BGZ as shortable again. I wouldn't bet on that continuing, though.

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#32) On March 08, 2009 at 4:54 AM, PrestonCheek (32.89) wrote:

Anchak, that was a great read, I found it going back through some of GV's blogs.

Would you mind doing a blog on a how to guide about hedging your bets. I need some help and I'm sure a lot of other people need them as well, if not just me then. :)

I would like to have some direct information on hedging, like if I'm long TYP how and when to hedge that.

I would help promote the blog as well for others to read.

Thanks again Anchak.

Preston

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#33) On March 13, 2009 at 12:25 AM, PrestonCheek (32.89) wrote:

Anchak, I'm commenting on your last piece in GV's blog, thanks for the correction and don't worry about being harsh, sometimes thats what it takes to get the message across. I realize that I have a lot to learn and I don't mind the critical comments, it's very humbling to me and I appreciate it in every way.

There is a lot to learn and that in fact is what makes it so interesting for me and others probably, just a thought. Before I bought my first ETF I read all I could but the different terms are enough to learn, much less the fundemental operations, I never knew some things could be so greek to me. It's like trying to learn quantum leap Engineering. :)

Again thanks for the information, I'm hoping that you and others don't get aggravated by us amateurs and quit offering advice, especially since it's free.

Preston

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#34) On May 17, 2009 at 7:15 PM, walt373 (99.86) wrote:

I was able to short FAS and FAZ using Scottrade. Just started... posted a blog about it here. Wonder how this will go? :D

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