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herztical (27.91)

Shortsellers Still Control this Market

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April 08, 2010 – Comments (5) | RELATED TICKERS: FAZ , TZA , SDS

Where have all the bears gone? It seems to me that they have been targeting the 3x bear funds lately. Countless fools have preached that these are only to be used as short term trading vehicles; well it also seems they are great shorts (as long as you're on the right side of the trade). 

Take a look at FAZ .  Since it's peak at around 2,000 (remember it had a reverse split that worked oh so well) it now trades for about 12 bucks.  Despite the volatility collapse, on the short side, that is still some return.  Now take a look at the volume, on average it trades 60+ million shares a day.  Its total outstanding is 91.4 million shares. Do you really think that this daily flow is legit?  To legally short, you have to get a borrow first.  There is no way institutions are "borrowing" the stock before when 65%+ of it changes hands every day! The time you call someone who owns it to get a borrow, they probably already traded it. After all, what better way to pound out your bear frustrations on an etf that has no support from anything or anyone. Just like BSC and LEH, these things are truly defenseless and also have no government backstop, political backing, or popular support. The only difference is that the exchanges will keep them around to rack up high frequency commissions. I have a feeling these bear etfs will be shorted to 0 or close to 0 because you do need to cover eventually. 

 

 

5 Comments – Post Your Own

#1) On April 08, 2010 at 1:29 AM, portefeuille (99.66) wrote:

The trading of the leveraged funds does not directly affect the price of the underlying. So there can be no "bear attack" on those. At not in the way a stock can be "attcked".

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#2) On April 08, 2010 at 1:34 AM, portefeuille (99.66) wrote:

For those not already familiar with this topic here are some articles/posts.

Embedded_Volatility_in_Leveraged_ETF_021709.pdf

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

Any sense holding on to FAZ at $28??

Leveraged ETF Arbitrage (LETFA) w/ Real Money

1,2,3,4,5,6,7(!),a,b,c,d,e,f,g(FAZ),h,8,9(2 videos at the bottom),10 (I suspect the term "volatility decay" got some impetus from this article),11,12,13,14,15(!),16,17,18,19,20(calculation at the bottom).

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#3) On April 08, 2010 at 1:42 AM, portefeuille (99.66) wrote:

I skipped one step in comment #1 above of course. As the trading of a leveraged fund does not directly affect the price of the underlying and the price of the leveraged funds is mostly (there are small "aberations" usually) determined by a function of the price of the underlying (and its "previous closing price") the trading in the leveraged fund does not have a direct effect on its price. There is some feedback as those leveraged ETFs work via (other) derivatives of the underlying. More on all that can be found in the articles and posts linked to comment #2 above.

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#4) On April 08, 2010 at 1:50 AM, portefeuille (99.66) wrote:

also interesting.

The Long Term Behaviour of Leveraged ETFs

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#5) On April 08, 2010 at 8:47 AM, herztical (27.91) wrote:

port thanks for taking up 4 posts, what I'm sayng is that large players are not playing this "legally" ie. securing borrows before shorting.  yes you can say well if the underlying assets (parts) are worth more then the whole thus an arb opportunity would be present, but I don't think so; it is more like a tail that wags the dog instead.  FAZ isn't totally the true underlying financial stocks; it is mostly swaps on Russ 1000 Finan Indx; thus if no one wants these or they don't trade openly, how do you determine a FMV?  

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