Hey guys- I had a scenario I wanted to throw up on the wall and see what your thoughts were on it. This has to do with any pair of inversely-related ETFs.. one long, one short of a given sector, index, etc. Lets take for example the FAS and the FAZ FAS is 3x long financials, FAZ is 3x short financials. The "idea" with these ETFs is to "try" to maintain that 3x long or short pricing. Obviously, its not always accurate. For example, the FAZ gained 15.13% today, while FAS lost 12.74% Here is the scenario- say you were making a trade in FAS, and it got away from you. You are now in the red, and realize things arent looking good short term for FAS. Normally, you would sell at a loss and look to get in at a better position. But lets say a good entry point is still a ways off due to recent price action ..you can sell and take the loss.. OR can you simply take an equal amount of $$ and buy the FAZ? This should more or less halt your losses (and gains) until FAS gets to a better entry price.. then you sell FAZ and continue on with your FAS trade, only you managed to "remove" the losses you would have incurred on the way down. This seems too easy.. is there something wrong with my logic? Here is an hypothetical example: You buy FAS FAS trades lower, and you're down $1000 You don't want to realize that $1000 loss- but you don't see a good entry point now for a ways down. So you take an equal amount of $$ and buy FAZ. FAS trades lower and lower- you lose an additional $3000 on your FAS position. However, FAZ gains $3000 at the same time (more or less) so your net at this point is still -$1000 Now FAS is setting up for a reversal- so you stay in FAS and exit your FAZ position for +$3000 Now you are only in FAS, and down $4k - but you made $3k on FAZ, so you're down $1000 overall, but now further along in the pullback and ready for a reversal. FAS moves up a bit and you gain $1000 and exit at breakeven. If you had simply held on for dear life and tried to get back to breakeven.. you'd need a $4000 gain from the 2nd entry point, rather than just $1000 hmmm
Why not save yourself all the trouble and just exit when you would go to buy the other one... obviously something triggers you to buy the inverse to protect further price deterioration.. so why not just exit the original position?? And at the point where you would decide to sell the inverse one just buy back into the original one? Why complicate it? only time I can see such a strategy being beneficial is say around tax time when you have a gain in a stock but don't want to sell and take the cap gains but don't want to risk losing your gain... Also, holding leveraged ETFS for a long period of time is not a very good idea, holding them both doesn't mean you are 100% protected, you can see some money deteriorate from both positions
Hmmm some further investigating of the FAS/FAZ relationship shows me that *both* closed lower on Friday than they opened on Monday. FAS down approx 8.39% for the week and FAZ down approx 8.42% for the week soo.. so much for that I guess (?)
Frost- you may be right- i've just never really thought about it this way.. I'm typing aloud haha I suppose doing the above is the same thing as exiting at a $1000 loss and simply re-entering at the next good entry. In fact, I think you may actually pick up more shares that way. by the looks of my calculations on the week- buying into FAZ would have made things alot worse.
no, both the FAS and FAZ are at their lows, anything with that much leverage erodes over time. The better strategy would be to short both as soon as they were issued.
how long does the erosion take.. I've heard about it, but don't really know the timeframe in which it takes place. Is FAS trading way down there due to the collapse of the financials, or also due to erosion? if so, how much is due to erosion- its only been around awhile..
You'll get cover-call in a day or two (max). Only people who make consistent money out of this combo is Direxion Cheers, Sudhaker http://nopdt.com