Has anyone thought about a trade where you short a pair of 3x ETFs? i.e. BGU/BGZ, FAS/FAZ, ERY/ERX? Seems like this would be a good way to profit off of their erosion without too much risk.
the problem is that you don’t know how well they will track their underlying index and if you go long both, you’ll get smashed. are you thinking of going short FAZ and short FAS? if thats the case, you would still be susceptible to erosion in both. either way, unless you choose a direction, you will get crushed. not worth the trading costs to experiment with something that i’m pretty sure is against you at all times.
thems Wrote: ------------------------------------------------------- > Has anyone thought about a trade where you short a > pair of 3x ETFs? i.e. BGU/BGZ, FAS/FAZ, ERY/ERX? > > Seems like this would be a good way to profit off > of their erosion without too much risk. if you can get good borrow, then it works. Also, the erosion only happens if it’s a volatile market… in a trending market, they would not erode.
ConvertArb Wrote: ------------------------------------------------------- > thems Wrote: > -------------------------------------------------- > ----- > > Has anyone thought about a trade where you short > a > > pair of 3x ETFs? i.e. BGU/BGZ, FAS/FAZ, > ERY/ERX? > > > > Seems like this would be a good way to profit > off > > of their erosion without too much risk. > > > if you can get good borrow, then it works. Also, > the erosion only happens if it’s a volatile > market… in a trending market, they would not > erode. this is not true about the erosion. its not volatility that matters. unless by no volatility you mean a market moving heavily in one direction with little restraint. it doesn’t matter if the index is up 10% then down 10% or up 1% then down 1%, the effect is the same, relative to the move. if you’re going to invest in these hoping for a long-term, steady uptrend, why not just buy stock on margin the old fashion way, avoiding internal MERs and leverage costs and limit your overall downside.
Can you make enough doing this to overcome margin costs, for one. You are saying short both of them, right, not a long/short? I asked an ETF salesguy about doing this once and he said that it was ‘not a bad idea’.
MattLikesAnalysis Wrote: ------------------------------------------------------- > ConvertArb Wrote: > -------------------------------------------------- > ----- > > thems Wrote: > > > -------------------------------------------------- > > > ----- > > > Has anyone thought about a trade where you > short > > a > > > pair of 3x ETFs? i.e. BGU/BGZ, FAS/FAZ, > > ERY/ERX? > > > > > > Seems like this would be a good way to profit > > off > > > of their erosion without too much risk. > > > > > > if you can get good borrow, then it works. > Also, > > the erosion only happens if it’s a volatile > > market… in a trending market, they would not > > erode. > > > this is not true about the erosion. its not > volatility that matters. unless by no volatility > you mean a market moving heavily in one direction > with little restraint. it doesn’t matter if the > index is up 10% then down 10% or up 1% then down > 1%, the effect is the same, relative to the move. > if you’re going to invest in these hoping for a > long-term, steady uptrend, why not just buy stock > on margin the old fashion way, avoiding internal > MERs and leverage costs and limit your overall > downside. I tried to follow what you just typed and having problems… first I said volatile markets make the erosion work, not “no volatility”. Why don’t you model a 3 X leveraged fund that trneds up 1% per day for one year vs one that goes up 3% then down 3% and get back to me.
ConvertArb Wrote: ------------------------------------------------------- > MattLikesAnalysis Wrote: > -------------------------------------------------- > ----- > > ConvertArb Wrote: > > > -------------------------------------------------- > > > ----- > > > thems Wrote: > > > > > > -------------------------------------------------- > > > > > > ----- > > > > Has anyone thought about a trade where you > > short > > > a > > > > pair of 3x ETFs? i.e. BGU/BGZ, FAS/FAZ, > > > ERY/ERX? > > > > > > > > Seems like this would be a good way to > profit > > > off > > > > of their erosion without too much risk. > > > > > > > > > if you can get good borrow, then it works. > > Also, > > > the erosion only happens if it’s a volatile > > > market… in a trending market, they would > not > > > erode. > > > > > > this is not true about the erosion. its not > > volatility that matters. unless by no > volatility > > you mean a market moving heavily in one > direction > > with little restraint. it doesn’t matter if the > > index is up 10% then down 10% or up 1% then > down > > 1%, the effect is the same, relative to the > move. > > if you’re going to invest in these hoping for a > > long-term, steady uptrend, why not just buy > stock > > on margin the old fashion way, avoiding > internal > > MERs and leverage costs and limit your overall > > downside. > > > I tried to follow what you just typed and having > problems… first I said volatile markets make the > erosion work, not “no volatility”. Why don’t you > model a 3 X leveraged fund that trneds up 1% per > day for one year vs one that goes up 3% then down > 3% and get back to me. you want me to compare 3% up then 3% down to 1% up then 1% down? or do you want me to compare the 3s to 1% up for 252 days?
up 1% for 252 days VS up 3% one day, down 3% the next… also calculate the volatility on both… (0 for the first)
up 1% for 252 days VS up 3% one day, down 3% the next… also calculate the volatility on both… (0 for the first)
Matt, I’m not sure that you’re understanding what I mean. I’m suggesting going short FAZ and FAS simultaneously, so I’m not taking a directional position, and profiting from the fact that they seem to both have been experiencing long-term erosion. ConvertArb makes a good point, though. If the market were to make a strong, prolonged move in a given direction without coming back it would likely blow up the trade.
thems Wrote: ------------------------------------------------------- > Matt, > > I’m not sure that you’re understanding what I > mean. I’m suggesting going short FAZ and FAS > simultaneously, so I’m not taking a directional > position, and profiting from the fact that they > seem to both have been experiencing long-term > erosion. > > ConvertArb makes a good point, though. If the > market were to make a strong, prolonged move in a > given direction without coming back it would > likely blow up the trade. kind of like LTCM, they had a good idea which would work in long term but short term trends killed their strategy
yeah i get it now. i misread what convert said in his first post. i share rebut after i think about this again.
okay. so i think i worked it out. at up 10%, down 10% there is erosion. at up/down 10%, down/up 9.09%, there is nothing at all, you will end up even. at up/down 10%, down/up below 9.09%, you will lose everytime. so basically, if there is a trend over the time of your trade that has the strength of 1.1011 overall, you will lose in this trade. thats a tough call to make. you’re basically saying, i’m betting that the market will not find any direction whatsoever, over the time that i hold this trade. the reason why this trade sucks is that the lowest either one can go is 0, but before one reaches zero, the other will have probably quadrupled or more. being short one of these over time will likely put you into a sack.
the above is mostly right but a little wrong. the second line: ‘at up/down 10%, down/up 9.09%, there is nothing at all, you will end up even’ should be ‘at up/down 10%, down/up 8.18%, there is nothing at all, you will end up even’ as you have to apply the 0.91 factor to both securities. this 8.18 isn’t perfect either and in my one example i did on my paper here, it leaves a loss of 0.0028%, but its close enough. this isn’t including trading costs either, so based on your size and platform, this number goes up accordingly. overall, not a good strategy. the etf guy you talked to is probably told to boost volumes as much as possible as they know the odds are completely against you. to revise the trend strength, if a trend is established of 1.2022 overall in either direction, you will lose on the trade. *this doesn’t including trading costs.