July Will Be a Turning Point for FAZ

July is going to be an interesting month for FAZ. FAZ, which has only been around for less than a year, has already experienced three distinct market environments: a strong bear market with high volatility, a strong bull market, and, recently, a sideways markets primarily marked by low volatility.

July most certainly will be the turning point for FAZ. Most financial institutions report earnings, and, new (most likely surprisingly bad) economic data will be released. These factors ensure higher volatility, which is an important factor to prevent exponential decay in FAZ's price. Whatever direction the market takes, however, it will have a profound effect on FAZ’s price. If the bull market continues (which is highly unlikely), its price will drift towards $2.00 and lower. If a bear market appears (which is highly likely), its price will move into the $6.00 range, but most likely much higher. If the market remains in its current state, FAZ’s price will move to $5.94.

Here is my model for July 18 price projections (when July options expire). Note: the upper and lower price ranges assume higher volatility.

What does this mean? Absent a continuing bull market on financials, it is highly probable that FAZ will reach $6.00. This provides a great option trade, selling covered FAZ July $6.00 calls. Assuming that the option gets called in, which is highly probable, it yields a one-month return of 16%.

A more aggressive strategy would be to buy FAZ July $6.00 calls or FAZ July $7.50 calls. Each of these strategies has a 49% and 47% chance of breaking even respectively.

Disclosure: Long FAZ.

Comments

[AndrewBaker:]

I think too that FAZ will make a comeback during July, given that today (23 June) it can close at or above $5.40 and make it to $6, hopefully by the month end. In this scenario, I see it up by 50% from there to $8.10 by the end of summer. Who knows, maybe higher, with $9 not unreasonable so long as volatility doesn't get too great (on the down days of course!)

My reasoning takes account of SEF, an unleveraged financial ETF, as looking at leveraged charts does not allow for the effect of the decay caused by the leverage and volatility. The above on FAZ requires that SEF closes at $60.28 or above today, then makes it over $66, where $72 is then the next step-up.

This gives SEF a 20% upside, and I've taken 10% off the 3x leverage to allow for the down days, hence the prediction of FAZ going from $5.40 to $8.10.

Financials are too high, and I know the market can stay unreasonable longer than I can stay solvent, but this is one bet I'm feeling fairly confident about.

So, come on you guys holding the financials, get real, realize they're overpriced and sell 'em. You know it makes sense.

As you would expect, I am long FAZ.

Jun 23 12:38 PM

[Sovestor:]

Unfortunately, FAZ has weakness in its structure. Read the prospectus. Volatility can kill FAZ to zero even if financial stocks go down.

Jun 23 12:41 PM

[dmz50:]

I'm long FAZ for reasons uknown to the human race. LOL.

Jun 23 01:31 PM

[User 331975:]

The FAS/FAZ trade game is very explosive and risky even in a flat market. Love trading these daily but hold for long periods takes nerves and huge commitment. I see FAZ long as a good play, but trading with a close eye using stops can help with the heavy down days they incur.
Good luck to all traders.
Jim

Jun 23 04:15 PM

[Gary Gallo:]

FAZ was under 5.00 that's reason enough to buy it. Down from over 100.00. Whenever a 3X is under 5.00 it offers excellent risk reward. As I stated on this forum when I bought FAS at 3.71 only to sell at 10.00 and 13.00. Huge upside, 5.00 downside, ill take that any day. Oh, and yes im very Bearish here.

Jun 23 07:14 PM

[Kunst:]

"These factors ensure higher volatility, which is an important factor to prevent exponential decay in FAZ's price."

Actually, exponential decay is increased by higher volatility. If you remember your high school algebra,

(1 + x) (1 - x) = 1 - x^2

A 10% rise followed (or preceded) by a 10% decline, leaves you down 1%. At 20%, you are down 4%. By the time you compound even a 5-10% daily rise/fall, which is common, FAZ (and FAS) has nowhere to go but down.

Jun 24 11:43 AM

[Richard Graham:]

What I was trying to imply is that with greater volatility there is the opportunity for greater price movement. You are correct that if it goes up 10% one day and down 10% the next, you lose 1%. However, if we enter a heavy bear market, multiple heavy down days for the market will push up FAZ even if the market attempts to bounce back on some days. The multiple down days with compound, and higher volatility will create higher returns, even in the face of some days where FAZ has negative returns. If you go up 10% two days in a row, and then down 10% the next day, you still make money.

Additionally, you are probably right that over the long term FAZ has nowhere to go but to 0. But, in the short-term (July), where there will be much volatility and market movement, I believe that FAZ is a good play.


On Jun 24 11:43 AM Kunst wrote:

> "These factors ensure higher volatility, which is an important factor
> to prevent exponential decay in FAZ's price."
>
> Actually, exponential decay is increased by higher volatility. If
> you remember your high school algebra,
>
> (1 + x) (1 - x) = 1 - x^2
>
> A 10% rise followed (or preceded) by a 10% decline, leaves you down
> 1%. At 20%, you are down 4%. By the time you compound even a 5-10%
> daily rise/fall, which is common, FAZ (and FAS) has nowhere to go
> but down.

Jun 25 01:49 AM

[disaster2008:]

Thanks. I have bought into FAZ and SDS in the last couple days because I think the market is heading down after selling most of my long individual stock positions except a few with decent dividends and upside (UNTD). Admittedly, I really don't know that much about FAZ and SDS and appreciate the info here. I would appreciate more info about how these are managed behind the scenes - like what are the underlying investments and how are they traded?

Jun 26 01:38 PM