trader39

Testing a Leveraged ETF Strategy

Hi Marc,
This is one of the first reasonable articles I've read on these ETFs. Thanks for your insight and analysis.

Taking Advantage of Leveraged ETFs with a Risky Arbitrage Strategy

OK I've thought about this a lot in the last day or so, some things to consider regarding this arbitrage strategy.

1. Many of these ETFs have distributions, a lot were fairly large and paid out in December, this is not reflected in the graphs shown above

2. This statement is misleading: For example, suppose BGU goes up 10%. BGZ should fall 10%. You've neither gained nor lost anything.

here is the explanation, suppose you open up a short etf pair position in BGU/BGZ and they are both trading at $100. after a 10% movement you have $110 in BGU and $90 in BGZ, no problem you say. But then on day 2, suppose BGU goes up ANOTHER 10%. now BGU is up to $121 but BGZ only goes down to $81. Your short position is now at a $2 loss. any time BGU goes up more, you will lose more money, you need a reversal to take advantage of the "slippage"

It seems that this strategy is only valid if it is certain that significant reversals will occur in these funds. (Like Augustus mentioned "lots of wiggles" are good) In general it appears that in the long term with any reasonable momentum either up or down will kill this strategy.

Conclusion: the term "risky arbitrage" is an oxymoron

Taking Advantage of Leveraged ETFs with a Risky Arbitrage Strategy

Tried to open up some of these positions this morning, broker indicated "shares not available to short" in many of these ETFs. Anybody have any advice how to proceed?

Taking Advantage of Leveraged ETFs with a Risky Arbitrage Strategy

This approach is brilliant! This is like being the "house" in Vegas.
btw, I would suspect you would need to meet full margin requirements for both positions even if ofsetting ETFs