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FreeMarkets (40.87)

How Make Money 100% of the Time



July 15, 2010 – Comments (13) | RELATED TICKERS: FAZ , FAS

This is no joke - it's a GUARANTEED way to make money over the long term, the short term and the medium term.  All you need to do is follow this perfectly sound advice.  If anyone can poke a hole in this system feel free.  The only downside I can see is that you won't make a lot, so if (and that's a big if) the market zooms up 200% over the next five years, you won't make anywhere close to that kind of dough.  But if you think the market will stagnate, drop or you just don't have the stomach for risk, I am going to give you a guaranteed method of making money. 

First, you need to understand that 3x ETF's suck.  They are great for short term trades (if you guess, err - invest, correctly), but over the long term they will never track 3x properly.  They will always come up just a bit short.  So, investing long term in a 3x is pretty foolish.

However, you don't want to short a 3x ETF and be wrong.  Sure they won't track 100% correrctly, but if that sector of the market jumps 100%, you won't lose 300%, but you'll probably be down 290%.

The GUARANTEED method to make money is to SHORT two corresponding ETF's.  For example, FAZ & FAS.  FAZ is short the financial sector and FAS is long.  

I repeat - you won't make a TON of money, but you WILL make money over every period of time.  If you think the market will tank, but don't have the stomach to short the market due to volatility, or just want to earn more than 0.25% in your money market account, you can't go wrong.

Good luck and good investing!

13 Comments – Post Your Own

#1) On July 15, 2010 at 10:29 AM, portefeuille (98.93) wrote:

as usual it is not quite that easy.

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#2) On July 15, 2010 at 10:32 AM, Griffin416 (99.97) wrote:

Yes I need to poke a hole in this and shed some light on this because I actually have been doing this since Jan 2009. The right amount seems to be between 5-10% of your portfolio maximum. The 3x etf lose about 1% per month on average and if the market is really volitile then it loses more. By the way, I like to short TNA n TZA or BGU n BGZ. They seem more availble and easier for some reason.

The problem comes when the market moves in one direction for a long time. Take for example what just happened (4-23-10 to 7-7-10), the market falls 16%. The TZA goes up 60%, while the TNA goes down 50%. You got screwed out of 10%, plus the amount of money shorted is vastly different. So when the market moves around your long/ short exposure is wacko and get screwed again.

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#3) On July 15, 2010 at 10:37 AM, FreeMarkets (40.87) wrote:

Griffin416 - I see your point.  Your exposure changes if the market moves in one direction by a large percentage, then you need to either constantly reallocate of you get screwed.  Thanks.

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#4) On July 15, 2010 at 10:39 AM, Superdrol (31.62) wrote:

I've also used this strategy in the past before, but I personally would not use this now.

The daily compounding effect errodes away after a long period of time.  So that is correct.

I was shorting FAZ a lot in 2009, but now the market is very volatile and does trend in one direction more often than not. 


If anything, I'd short the leveraged ETFs to the upside (bull).


The bear leveraged ETFs, all it takes is one screw up and you can easily lose your shirt.  As we know the markets fall much much faster than they go up and any exogenous event could wipe you out.

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#5) On July 15, 2010 at 11:02 AM, russiangambit (28.67) wrote:

How can you even short these ETFs in real life? They are never available for shorting in my experience.

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#6) On July 15, 2010 at 11:14 AM, Griffin416 (99.97) wrote:

Russiangambit, Yes! I have been constantly shorting them for 18 months, mostly shorting 3x bear etf's because of my bullish stance. Given my recent (4 weeks) bear stance, I closed them. They have been averaging 3-5% of my portfolio

You need the right broker firm, but because of supply constraints I also change which ones I short, sometimes TZA, BGZ, recently I have shorted SRTY and SDOW (availability changes). Sometimes it makes sense to call your broker and ask if they have enough of one etf to short. I literally have a list of the 20 or so 3x bear etf's and try to put in a trade until one hits, then I check, then click ok

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#7) On July 15, 2010 at 1:37 PM, leohaas (30.10) wrote:

It works if you can avoid a margin call.

Let us assume you start off shorting $1,000 worth of FAZ and FAS each. At that point, you have $2,000 plus the two shorts worth a total of -$2,000.

The day after you establish your position, the financials go down 10% because the Greeks default. Result: your FAZ short is now worth -$1,300, and your FAS short -$700. Nothing gained or lost yet.

But the next day, the financials drop another 10%. Turns out the Portuguese are in the same boat as the Greeks. Your FAZ short is now worth -$1,690, and your FAS short -$490. At this point you are $180 in the hole.

Using real data (creating this kind of position on 2/9/2009), this strategy would have put you $2,400 in the hole by 3/6/3009, or at -120%. Of course, if you survived the margin call and held on to yesterday, your profit would have been $1,220 (61%). Or you could have gotten out on 4/14 with a profit of $2,112 (106%).

Granted, my backtest is very subjective: glancing at the historical data, I guessed that the dates I picked would yield the worst possible result. Or would they? After all, FAZ and FAS were not around when LEH collapsed...

Bottom line: if you establish this kind of a position just before a large move down (or up) in the financials, you can get into trouble. If you manage to survive that trouble, you can indeed make a nice profit.

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#8) On July 15, 2010 at 4:16 PM, XMFCrocoStimpy (97.51) wrote:

The only way to truly make this system work is to rebalance on a daily basis, so that the amount of capital at risk on both the long side and the short side remains the same.  Otherwise you are subject to directional movements as leohaas has shown, and there is no guarantee that it will move back in your favor.  The killer of course is then the frictional costs of rebalancing.  If you accept the risk of letting the amount of capital get out of balance in the short term and get lucky, but experience the substantial types of margin calls demonstrated by leohaas, then you need to take into consideration either the interest that must be paid on the margin or the increased amount of cash that must be held against which you rightfully should calculate your profits.  Finally, the full cost of borrowing the shares to short must be taken into consideration - a cost often obscured in retail accounts (heck, even in commercial accounts if you aren't paying close attention) that can deeply eat into a thin profit margin.


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#9) On July 16, 2010 at 11:38 AM, leohaas (30.10) wrote:

Daily rebalancing is not the solution: it guarantees no profit or loss. Here is why: "The day after you establish your position, the financials go down 10% because the Greeks default. Result: your FAZ short is now worth -$1,300, and your FAS short -$700. Nothing gained or lost yet." This is always true, regardless of which percentage up or down the market goes that day.

Actually, it guarantees a loss (your trading cost)!

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#10) On July 16, 2010 at 11:42 AM, Superdrol (31.62) wrote:

Better way to play this is set up some type of options spread instead.  That way you can hedge out risk and capitalize on theta.

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#11) On July 22, 2010 at 4:48 PM, syknyt08 (< 20) wrote:

I started a test portfolio on Sept 25, 2009 shorting FAS by $10,682 and FAZ by $10,380. I've held those positions since I started the portfolio (I never re-balance). As of end of trading today, July 22, 2010, the portfolio is up 30.09% for a $7,523.52 gain. During the exact same period, the S&P 500 was up 5.03%. So, it has certainly out performed during this period. I've watched the portfolio closely and noticed it does best when there is a significant intraday price change. That's because of the mechanics of the leveraged ETF's.

If the price of FAS, for example, actually rose at 3x the financials, the share price would soon be too expensive for many investors and eventually may be too illiquid to be practical. So, that's one of the reasons why the price is usually adjusted daily against the trend. Shorting opposing leveraged ETF's gains you the daily adjustment. Of course, that means the adjustment is greater when there's a big move in the price during the trading day.

To answer an earlier question, my broker does allow me to short the 3x ETFs. But, they don't allow you to use margin.

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#12) On July 22, 2010 at 5:00 PM, syknyt08 (< 20) wrote:

It would be helpful to mention that there have been days where I lost money. From 6-29-2010 to 7-2-2010 I was down $215. But, I have $13,445 in cash in the portfolio and I've never had a margin call.

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#13) On July 28, 2010 at 4:48 AM, WallstreetKnight (40.69) wrote:

Does etrade allow the shorting of these?

What brokerages do?  Also, Griff, if you go down the list trying to short them, do you ever run into a situation where you can short one etf but not the corresponding inverse? 

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