Short 3x ETF

[ArkhamB]

Aiki since you were talking about shorting FAS/FAZ in the video posted earlier. Would a similar position on MWN/MWJ work out the same way? It looks like they are both earlier in their life cycle and have more value to lose. Also I've looked at their prices since their inception and they both are down...MWJ -9% and MWN-45%.

Is this something that can be done with options contract, if the shares aren't available to borrow? And is it possible that Direxion would close the ETFs at some point, and I would lose all money invested in the options?

Brian

[Albert0373]

These 3x ETFs all have time decay, which are the result of daily compounding on the NAV. The amount of decay depends on how volatile the index is and how leveraged the ETF is. And from what I remember from past discussions here, playing options/leaps on these aren't exactly optimal/viable. As aiki mentioned:

Well, here's the deal. There is not much open interest, only an idiot would write them as I see it. Since the combined value trends to zero it follows that both bull and bear go to zero individually. The puts on both FAS an FAZ sell for the same price pretty much. The FAS7 puts are $4 which means at zero your return is $3 or 75% over 20 months. Not the greatest since it'll be tying up your money for so long. Now writing calls might be a better play cause there is open interest (don't ask me why)and they get an ok price.


Once it is announced that an ETF will close, there is a period of time (3-4 weeks) that it is still traded. This is currently the case with the Ameristock Treasury bond ETFs, which will cease trading today.

In this time period, investors can buy or sell shares as they normally would. On the day that the ETF closes, all trading stops. The provider then has a period of time (about 2 weeks) to sell the underlying securities within the ETF.

The proceeds are then distributed to the owner of record. The owner will get the value of the securities from when they were sold, not when the ETF stopped trading. So, if you’re holding the ETF when it closes, you’re running the risk that the underlying securities could go down (or up) in value in that time frame.

If you want to know the value you are getting from your ETF, it might be better to sell the shares before the ETF stops trading. Otherwise, you’re left cooling your heels and won’t know what you’re going to get until the securities are sold and proceeds are distributed. It’s up to your risk tolerance.

But the closing of an ETF is an orderly process, and investors are given plenty of warning so they can plan accordingly.
http://www.traderplanet.com/blogs/smarttrader/2009/04/02/what-happens-if-you-own-an-etf-that-gets-closed/

[ArkhamB]

Thanks for that info Albert.

Brian

[BULLSEYE]

why not short FAZ/FAS still? regardless of where you enter on the price, the most you can get out of the short is 100%. IF price is 100 or if its 2 dollars.. still only 100% max return. And FAZ/FAS is prob still most volatile levereged etf out there.

[ArkhamB]

Now I'm new to this but if I'm missing something tell me.

Your max return is always 100% but if a stock is $50 and falls to $10, your profit is $40 per share minus costs. If a stock is $5 and falls to $.25, your profit is only $4.75 per share minus costs.

Or do the option contracts cost that much more on the higher priced stocks, nullifying the larger profit?

[Albert0373]

Now I'm new to this but if I'm missing something tell me.

Your max return is always 100% but if a stock is $50 and falls to $10, your profit is $40 per share minus costs. If a stock is $5 and falls to $.25, your profit is only $4.75 per share minus costs.

Or do the option contracts cost that much more on the higher priced stocks, nullifying the larger profit?

:idea:

That reminds of this one thread where we cleared up percentage gains through shorting: http://www.onlinetradersforum.com/showthread.php?t=10068

Presumably, the options will cost you more as the commissions will bite you hard unless you're trading them at a flat-rate.

[BULLSEYE]

Now I'm new to this but if I'm missing something tell me.

Your max return is always 100% but if a stock is $50 and falls to $10, your profit is $40 per share minus costs. If a stock is $5 and falls to $.25, your profit is only $4.75 per share minus costs.

Or do the option contracts cost that much more on the higher priced stocks, nullifying the larger profit?


yea but im assuming for the more expensive stock you would have less shares. if you invested 5k in each stock.. your profit would still be the same. if the share price goes down 20%, you would return 1k in profit from the short. regardless if its the 50 dollar stock to 40, or 5 dollar stock to 4. its still 20%.