Luck-o-the-Irish

Make Money in a Flat, Volatile Market by Short Selling Leveraged ETFs

This is true, but if you are short, and you are wrong, let's say you shorted FAS back in March, you could wind up with a loss of 100% or 200% in a rather quick fashion. Right now, we certainly have the volatility, but until the last week, we have only seen trends. The first went straight down in February, early March, then we saw the reverse in March-April, on the straight up path. If you had been too aggressive on either, and it was too large a percentage of your portfolio, you would have been wiped out. That does not invalid your point, but you fail to talk about ANY of the risks associated with this strategy at all.
Secondly, you have to worry about the inventory issue. First, you have to find the shares to short. Then, and most importantly, you have to be able to HOLD your inventory. You completely fail to mention the buy in risk on these, and it is a major risk. You would not be a happy camper if you short one of these, the market moves against you, and then you are forced to buy at a higher price, and there is no inventory to short. You may very well have been right in your short, but you are given the time to wait it out, and instead forced to take a loss.
I applaud you on the concept. It is a valid premise, but your failure to examine the risks is a pure shame.

Arbitrage Opportunity in Ultra ETFs

It is not the end result you care about, it is how it gets there. Just because you start net long, net short, or neutral, if enough time passes, you could make money in any of the starting positions based on how the market got there. However, if you look at Mar 9th closing to now, and you take this scenario of going long $500 SPY, short $1000 SSO, short $500 SDS for a net short credit of $500, you would have bought 7.4 shares of SPY, shorted 69.1 shares of SSO, and shorted 4.34 shares of SDS. Since we are in a trending market, you would now find yourself sitting with a liability of roughly $1378 or -1378. Remember you only got $500 on the sale, so you are down 878. For some people, this literally could have been their ENTIRE account. Since you can margin these, and you have short positions, and believe me you ARE paying interest, you are not getting any, there are risks here. In a trending market, the compounding can hurt you as much as it can benefit you. You have to play this kind of game with a deep wallet or using no margin.


On May 06 05:55 PM Zac wrote:

> Irish,
> But in the above example the S&P went up 5%, so if he was net
> short wouldn't he have lost money as opposed to returning 1.715%?
>
> Thank you for your posts, very interesting stuff.
>
> On May 05 05:54 PM Luck-o-the-Irish wrote:

Arbitrage Opportunity in Ultra ETFs

We do this, and have for years, and I can tell you with certainty on the cash that what I said is correct at the current moment. It doesn't make it a bad strategy though, and I never intended the comment to imply this.


On May 06 01:00 PM Robert Zingale wrote:

> Luck-O-Irish I see what you are saying about the exposure. I was
> originally just looking at the asset allocations within the ETF to
> construct the portfolio and forgot how the returns on SSO are actually
> not completely covered under my article. It would be better to replace
> the $100 with only $75. This would still leave the strategy at a
> 28.15% return when I wrote the article.
>
> As for what you are saying about the cash not being free, you may
> be completely right. I have not attempted to complete this transaction
> yet.

Arbitrage Opportunity in Ultra ETFs

What is your point?


On May 05 07:08 PM PutneyHillYank wrote:

> Give it a rest if you have assets in equity markets you like but
> need some comfort then buy some BGZ its that simple.

Arbitrage Opportunity in Ultra ETFs

Not even related to the topic. What gives??


On May 05 07:24 PM PutneyHillYank wrote:

> I will say that the 2 cent miss by CHK resulted in my opening a long
> postion in that one when it was down 12 percent for the day this
> afternoon. But trading is easy just fade the crowd when they are
> in extreme mode.

Arbitrage Opportunity in Ultra ETFs

Robert,
Shoot me an email (tcollins@claruspartne... I'd like to talk with you further if you have any interest.

-tim

Arbitrage Opportunity in Ultra ETFs

One other caveat...your cash is not "free" These are hard to borrow securities, and you WILL pay interest on your short positions. In some cases, it will be large as compared to any short interest rebates you may be able to obtain. The margin maintenance on some of the leveraged short positions, especially 3x, will be 100% of the short value, so you are not able to use that cash for much, if anything. We have been doing this along with options strategies around it for quite some time, and know the actual costs. Also, you need to be very patient, and on top of it. The strategy does not look very good when the market goes up for 8 straight weeks either. If you aren't familiar with it, you are bound to capitulate and rebalance at the most inopportune time.

Arbitrage Opportunity in Ultra ETFs

This would create a short position as BGU equals -450, BGZ equals +300, and IWB equals +50.
You would create a net short position of $100 on the IWB, so you better be bearish.


On May 05 05:21 PM snoopyjc wrote:

> How about shorting $150 BGU, shorting $100 BGZ, and buying $50 IWB?
>
> --joe

Arbitrage Opportunity in Ultra ETFs

Pick target rebalancing or use a stop loss.


On May 05 11:23 AM Augustus wrote:

> I sure like the concept. Do you have any suggestions related to possibly
> rebalancing the portfolio at different stages of imbalance?

Arbitrage Opportunity in Ultra ETFs

Do the math...long $50 SPY is long $50, short $100 SSO is like being short $200 SPY, and being short $50 SDS is like being long $100 SPY, so you are NET short in this portfolio, which is the real reason for the decline in 2007 and the rise in 2008 ($50+$100-$200= - $50).
However, this idea holds merit. We use a similar setup like this in our hedge fund as part of the strategy; however, there are overlay and advantages when adding in option arbitrage trades (InterETF spreads) that we have also pioneered. Obtaining the shares to short is VERY difficult. Fortunately, we have been able to locate and obtain shares. If any qualified investor would like to know more, please shoot me an email.

Leveraged ETFs: Making Volatility More Volatile?

Also, doesn't it strike anyone as odd that the negative article referenced here was written by Barclays...a direct competitor to the leveraged ETF providers. One would have to assume that for every dollar invested or traded in the leveraged ETFs would be two or three dollars NOT invested in the Barclays ETFs...

Leveraged ETFs: Making Volatility More Volatile?

inthemoney
Leveraged ETFs actually STOP creating or redeeming shares in the last 30 minutes of the day. This is the only time the market isn't as impacted by these positions, and this is when it has been the MOST volatile. Perhaps removing the leveraged ETFs may create MORE volatility or more downside, as people have to put more money at risk or feel as those they have little or no downside protection, so they just outright sell.


On Apr 27 11:34 PM inthemoney wrote:

> > Leveraged ETFs came out in late '06 and really got going in '07
> and '08. Can't we think of other things that might have caused increased
> market volatility, such as issues surrounding an epoch credit crisis
> and challenge to the viability of our financial system, not to mention
> the recession that went along with it.
> ----------------------...
>
> We see 2% moves almost on daily basis in the last 30 min of trading.
> I think it is a high time somebody looked into this. If it was the
> economic situation that made the market super-volatile, it would've
> been distributed throught the day (and there is some of that) but
> the 90% is in the last 30 min.
> For anyone watching markets daily it is very very obvious. A lot
> of people can actually predict the moves, and front running them,
> thus making the move even bigger. The last 30 min move is usually
> the opposite of the move on that day, but in the direction of the
> previous day (if that was opposite). If the previous day was in the
> same direction, then the last 30 min is in the direction of the day.
>
> Now, if I can figure it out, what the Wall Street wizards with power
> tools are doing with this information, what do you think?

3x ETFs Are Wealth Destroyers

The inverse are total return swaps. According to Direxion, the long 3x, actually invest 80% of the share into the underlying common/index, then leverage the remaining 20%.

Ok...we all know this already. Nothing new here.
How about a trading idea?

Understanding Levered ETFs and Geometric Returns

The firms have the ability to "cash out" the leveraged ETFs or remove the leverage when an index declines by a large percentage in a single day, thus preventing them from going to zero.


On Jan 05 07:27 PM igggy wrote:

> I would like to know what happens with a 3x ETF when the underlying
> index goes 33.3% against it. Does the ETF just go to zero and die?
> Obviously, the same question applied to 2x ETFs if the index goes
> 50% the other way. I know it's a far fetched scenario but I wonder.

Understanding Triple Leveraged ETFs

Shares are difficult to borrow, but not impossible. We do it on a daily basis. Furthermore, you can use synthetic shorts. Also, just shorting both sides can be done, but in a sharp trend...hmmm...let's see, like late Feb or Mid March, you better have a heck of a lot of capital, because for how the compounding can help you over the long run, it can crush you over the short run. Just look at the latest run by FAS versus the drop in FAZ. Being short both, just during the downtrend or uptrend, would have resulted in HUGE losses, so unless you had the capital and/or margin room, a person may not have been able to wait for a reversal. If you had gone short both right around SPY 670, you'd still be waiting for that reversal and well underwater. Squark62 has a solid concept. Our firm's concept is a bit different, and done in more of an arbitrage format, and yes, we short these things and hold, but it is a concept more formulated, and protected, than just flat out shorting both sides. If you are wishing for the inventory to short both sides, and that is all you are doing...be careful what ou wish for and have a LOT of capital for your position.