Fas faz

[Mastajab]

Originally Posted by LongArm

No, volatility actually EXACERBATES the price decay of the leveraged ETFs. It's really just due to compounding and simple math:

If the index and 3xETF both start at 100, and the index goes up 10% to 110, the ETF goes up 30% to 130. The next day, if the index drops 9% to 100.10, the ETF drops 30% to 94.90. After 2 days, the index is a hair above even while the ETF is down 5.1%!

This strategy has been thrown about for a while now on the forums, and while it appears to work long-term, stretches of strong or sustained moves by the index in either direction can put you DEEP in the red at times, as timmhaan alluded to. Double-shorting the leveraged ETFs in 2007 generally would not have worked at all (unless you took profits during the brief periods you had them), although 2008 would have been a different story.

True.

[Rynn]

Originally Posted by LongArm

Double-shorting the leveraged ETFs in 2007 generally would not have worked at all (unless you took profits during the brief periods you had them), although 2008 would have been a different story.

Well, FAS and FAZ didn't exist in 2007, but for SSO and SDS,

SSO:
Jan 3 2007: $87.05
Dec 31 2007: $82.80 + $4.4162 dividend
Total gain: $0.1662 (+0.2%)

SDS:
Jan 3 2007: $57.25
Dec 31 2007: $54.18 + $1.7854 dividend
Total gain: -$1.2846 (-2.4%)

So if you shorted both, your net gain would be 1.1%, not counting any margin interest, which is pretty close to the 0.95% fees and expenses claimed in the prospectus.

[clavocat]

I actually brought this up to Aiki, I created a model that shows 3% time decay per month on average. You can short them both but if the market moves one way or another, one will go to 0 and no longer protect you.

The problem is, you make a high probability assumption and it works 99% of the time well and that 1% you get killed. There is a double bull mutual fund that has been around through the last bull market and went crazy. UOPSX went from 700 to 8 in a few years. Nasty time decay.

[johnlvs2run]

Originally Posted by aiki14

If you had shorted both FAS and FAZ on the day they were IPO'd you would be up 82% in six months, even with a margin interest rate of 10% you're up 77%.

Thanks for the explanation of how these things work.

Both FAS, and FAZ went up 7% yesterday.

[Florida]

Originally Posted by johnlvs2run

Thanks for the explanation of how these things work.

Both FAS, and FAZ went up 7% yesterday.

??????

FAS was down 8.9% yesterday, and FAZ was up 9.4% yesterday when compared to the previous days close.

From the open to the close, FAS was down 2.6% and FAZ was up 1.8% yesterday.

[johnlvs2run]

That's right.

According to the weekly picks, FAZ was up 6.99 and FAS was down 7.84.

[LongArm]

Originally Posted by Rynn

SSO:
Jan 3 2007: $87.05
Dec 31 2007: $82.80 + $4.4162 dividend
Total gain: $0.1662 (+0.2%)

SDS:
Jan 3 2007: $57.25
Dec 31 2007: $54.18 + $1.7854 dividend
Total gain: -$1.2846 (-2.4%)

So if you shorted both, your net gain would be 1.1%, not counting any margin interest, which is pretty close to the 0.95% fees and expenses claimed in the prospectus.

Sure, if you started at the beginning of 2007 and held until the end of the year you would have netted a tiny gain with SSO/SDS, but I was actually referring to how the strategy would have performed throughout the year. If you check out the attached chart, you'll see that for most of the year you would have been slightly in the red. And if you look at, say, QLD & QID, you would have been deeper in the red, on average.

[aiki14]

The good folks at the CME group have a great explanation of the phenomenon here:
http://www.cmegroup.com/trading/equi...raged_ETFs.pdf

The formula they use is a special case variant of Ito's Lemma which I referenced in an earlier post.

[Rynn]

Originally Posted by LongArm

Sure, if you started at the beginning of 2007 and held until the end of the year you would have netted a tiny gain with SSO/SDS, but I was actually referring to how the strategy would have performed throughout the year. If you check out the attached chart, you'll see that for most of the year you would have been slightly in the red. And if you look at, say, QLD & QID, you would have been deeper in the red, on average.

So what you're saying is that if the market continues to move in the same direction then the compounding works against you. So if, for example, QLD goes up 1% then you have:

QLD +1%
QID -1%

But if the next day QLD goes up another 1%, then the totals become:

QLD +2.01%
QID -1.99%

If you shorted both, you lose 0.01%

[Rynn]

The reality of these things is that they are mostly just swaps with each other. If a roughly equal amount is invested in each, then the total amount of money never changes, it just moves from one fund to the other.

The fund administrators have a fiduciary obligation to return that money to their shareholders, less the aproximately 1% administrative fee, which they generally do in the form of a dividend or capital gain distribution.

So basically this whole strategy becomes a matter of avoiding (or collecting) the dividend.