FAS and FAZ: A Short-Seller's Dream? 38 comments
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Since mid-November, the triple long financial ETF (FAS) is down 71% to $10.38, while the triple short financial ETF (FAZ) is down 95% to $4.43. Over the same time period, the financial index that the ETFs track is up 7%! Go figure. The triple leveraged ETFs track the daily return of the indices they follow, and their prospectuses do not suggest using them as long-term investments even if you think a sector or index will go up or down. Some people have seemingly figured out how to make money off of these triple ETFs, however. Go short both the triple long and triple short ETF, as they both drift towards zero in volatile markets. As shown below, short interest has risen to 25 million for FAS and 18 million for FAZ.
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This article has 38 comments:
You'll note that during the tremendous plunge downward to the November lows that FAZ provided huge returns. If there is any sort of sustained trend of consecutive up or down days in the financial markets, the respective ETF will explode. If there is any kind of choppiness in the financial sector, only day trading is recommended.
That being the case, as you correctly said, investors should only short these ETFs during a volatile market. There are arguments to made that we may see a sustained downtrend in the upcoming months, however, and thus it is likely not wise to go short on the FAZ (it is already quite low, regardless).
I have heard people say they are in this trade but i believe its an urban myth.
These ETFs are meant for day-trading, but if you want to gamble, expect a wild ride!
mindyourpolitics.blogs...
On Jun 12 06:00 PM joethebull wrote:
> The key point of emphasis in your post is that these ETFs both drift
> towards zero *in volatile markets.*
>
> You'll note that during the tremendous plunge downward to the November
> lows that FAZ provided huge returns. If there is any sort of sustained
> trend of consecutive up or down days in the financial markets, the
> respective ETF will explode. If there is any kind of choppiness
> in the financial sector, only day trading is recommended.
>
> That being the case, as you correctly said, investors should only
> short these ETFs during a volatile market. There are arguments to
> made that we may see a sustained downtrend in the upcoming months,
> however, and thus it is likely not wise to go short on the FAZ (it
> is already quite low, regardless).
Hooray for naked short selling!
Long? Short? wouldn't touch either with a ten yard roll of 100's. 2hr-4hr trades on these two reap a 20% avg when daytraded. Cap the greed factor, pay attention to the associated indicators (ie SKF), watch the news, play the real or sentiment factors, set a trailing stop loss if it makes ya feel secure and whack them at +20%....let the other traders have whatever is left...or not. Bank the profit, stow away the tax burden and move on to the next. Self discipline and concentration is the rule on these two. IMO
I did run a backtest and couldn't handle the potential damage caused by a long intense run as noted by 'joethebull', but then look at the professionals that got hammered during this period anyway.
Luck! ;=)
On Jun 12 07:34 PM Sicall wrote:
> Who would be dumb enough to loan stock on a triple leverage ETF ?
>
>
> I have heard people say they are in this trade but i believe its
> an urban myth.
The theory has merit, but the recommended execution here is not done in a risk managed fashion and the theory is flawed in its simplicity. There are no risks spelled out in this article, and that is truly ashame. It can be done, but needs to be done with additional hedging or you will go broke in a trending market that shows little volatility. Just look at FAS-FAZ from March 9th through yesterday.
Take a look at any relative performance of the two.
Had you shorted both (equal $ amts) in Sept' 08 I agree you would have made out.
But had you gone long both pairs in March you'd be up over 40% and be perfectly hedged.
happy grins to all
NOTE: BEFORE U GIVE ME A THUMBS DOWN ON THIS ONE, WAIT TIL THE END OF THE MONTH.
1) I don't know anyone who will take a short on FAZ/FAS, and I'd like to, though I would only short very short term due to potential big margin calls, very likely in a volatile market.
2) These are day-trading tools. Whilst you can hold for several days, and I have (though to avoid too big a loss rather than run a profit), the longer you hold, the more likely a move against you can hurt.
3) standfast - am I mssing something or misunderstanding? Had you bought both FAZ and FAS at the same time in March, as I see the prices, you would be down. The loss on FAZ far outweighing any gain on FAS. I haven't looked at every date, but I don't see even breakeven.
On Jun 13 03:56 PM mike78 wrote:
> I've tried to execute a version of this trade, but could not borrow
> any of the 3x levered ETFs apart from ERX (energy equities, which
> hasn't been a great one to short given the steady climb in oil and
> equity prices). Has anything been able to obtain the borrow on any
> other of the 3x ETFs?
Nonetheless, FAS is almost ready for taking a beating. The 5x rise from March ought to bring in a wall of sellers when the ETF loses 25% or more. Will most likely open short term put options if FAS falls below 9-ish. Buying a put now is probably not safe, can lose value in a jiffy.
We've been able to borrow. BGU, BGZ, FAS, FAZ, MWJ, MWN, TNA, TZA, ERX, ERY, EDC, EDZ, TMF, and TMV.
On Jun 13 03:56 PM mike78 wrote:
> I've tried to execute a version of this trade, but could not borrow
> any of the 3x levered ETFs apart from ERX (energy equities, which
> hasn't been a great one to short given the steady climb in oil and
> equity prices). Has anything been able to obtain the borrow on any
> other of the 3x ETFs?
Perfectly hedged? You've obviously not done the math on leveraged ETFs.
Trading options is also not a risk-free arb (take a look at the vol on these). You could create synthetic shorts by buying the put and selling calls to negate some of the premium costs but again, in practise, I would be surprised that anyone has been eating this lunch in a riskless manner. (High transaction costs due to frequency of trading and spreads).
I thought I played FAZ just right by buying puts. FAZ did drop but so did the option. Stupid me, my loss. Volatility was the culprit. With high volatility sometimes calls and puts can go up and down together, which is the opposite of what you are looking for.
On Jun 13 04:22 PM ultrashorts wrote:
> Another great way to play this is to buy puts on FAS or FAZ. I'm
> holding some FAS Oct 9 puts myself to profit off any potential down
> leg in financials as well as the inherent decay of the leveraged
> ETF.
Q: So, what is the immediate catalyst for BAC to move higher up?
A: I dont see any.
If BAC does not exceed the recent top next week that could be the signal that financials have run out of steam. Then FAZ is the place to be.
goodbye
On Jun 13 09:58 AM bsharvy wrote:
> I've never been able to short an ETF. Whoever is shorting this stuff
> doesn't use Schwab.
Note how the selling gives less and less of a drop each time. It is strange to think, but the higher the market goes and the less people are in it the easier it is for the banks to over come any selling efforts and keep it up.
the markets will go down when the big banks want it to go down, not before. they will keep driving it up until the retail investor bites and then they may take profits. the shame is that if they let it drop and the markets function in a normal manner much of the money on the side lines would enter.
At this point there aren't enough players in the market to make it go lower.
On Jun 14 11:32 AM capt Brian wrote:
> Interesting observation, I said in an earlier comment on this article,
> that one should not rate the comment I made til the end of the month
> because the comment cannot be good or bad til then, but already three
> negative responses have been logged, I guess I will stop commenting
> since it is just more nonsense and game playing, some of you need
> a girl friend, [or a boy friend whichever the case may be] I thought
> pecking orders were an animal thing, guess not nonsense ended.
>
>
> goodbye
DANGEROUS! I agree that these should never be held.
And, yes, eventually they will go to zero. But eventually ALL
stocks will go to zero.
It is worth everyone's time to understand how this works to take advantage of difficult borrows.
On Jun 13 03:56 PM mike78 wrote:
> I've tried to execute a version of this trade, but could not borrow
> any of the 3x levered ETFs apart from ERX (energy equities, which
> hasn't been a great one to short given the steady climb in oil and
> equity prices). Has anything been able to obtain the borrow on any
> other of the 3x ETFs?
...with double the transaction costs.
:-)