Averaging down with leveraged ETFs?

Discussion in 'ETFs' started by crgarcia, Sep 11, 2009.

  1. What you think of this strategy?

    Market goes down 10% (or 15%): 1x ETF (SPY, DIA)
    Market goes down 20% (or 30%): 2x ETF (SSO, DDM)
    Market goes down 30% (or 45%): 3x ETF (BGU)

    Since market needs to go down 50% or 33.33% in one day (it can't because of futures daily trading limits) you are blowup protected.

    Yet, you can still wath your account fluctuate down (temporarily) a lot.
  2. You have the "mechanics" of levered ETF's wrong. Do some more research. They're not designed to work that way at all & your plan would fall apart.
  3. yes these ETF's are crap for multi day hold unless the market trends very strongly, look at their charts vs underlying, averaging down would kill you. They are designed for daytraders and to hedge a decline over a couple of days.
  4. lindq


    From the march lows until now, the SPY has gained about 50%, from roughly 69 to 104.

    SSO in the same timeframe has moved from 14 to 33.

    You do the math.

    If you are betting on the long side in the overall market with an ETF, SSO is a decent instrument, especially when you consider that you need to tie up less capital to take the ride.

    IMO, what the market needs - and I'm surprised it hasn't been developed - is a mini/mini futures contract. About half the leverage of an E-mini, to permit greater flexbility in trading.
  5. Fractional Futures is a great idea!

    CME has rolled out e-micro's on 6 currency futures. $1 RT trading cost 1/10 the big contract.

    Problem is it doesn't trade the volume and price does not always track the big contract.

  6. But what of the fact it was at 100+ a couple of years ago? If he were averaging down, the "recovery" is very, very slow. These leveraged etf's are very trick to calculate for swing/long term.

  7. Hell yes, my friend. I saw an ad for a "mini ES" that was 1/10 of an ES. So basically US$1.25 per tick. Unfortunately, it was only available at an Australian brokerage and they won't accept US customers. I did an online chat with them and the first thing the guy said was "we don't accept US customers" (he noticed my IP address).

    Oh well. I would be ALL OVER a mini ES.

    Oh, and yeah, the huge spreads and non-existent volume on the e-micro currencies make them untradeable. Maybe over time they will get better.
  8. Hester


    Any long term strategy with 3X or even 2X leveraged etfs on the long side is a recipe for disastor. You just cannot over look the price decay. Do some research.

    If you want to hold this for a couple of months, you could get away with it I suppose. But, if you are a long term investor, and I think you are, then you will slowly underperform what the etf is theoretically supposed to. Especially in a volatile market. By long term investor I mean 12-36 months or possibly more.
  9. joe4422


    Kind of off the subject, has anyone ever shorted FAS and FAZ at the same time and just held them for a few months?

    Seems like the scam of the century.
  10. Hester


    Yes. This is a topic that I don't often find, but is logical. Look at long term charts of a 3X leveraged bear and bull etf and you'll find that this strategy would have made some serious money. Usually either the bear or bull gets hammered and the other one kind of just stays flat.

    However, There is one big problem with this strategy. If there is a huge move in the market, one of these etfs could easily double or triple in no time at all. Say another credit crisis or some black swan comes about, and the market unexpectadly crashes. The 3X bear position would destroy this trade and you would most likely have to cut your losses befor you get a margin call. That makes this trade dangerous

    To avoid the risk of a margin call after one of these doubles or triples, you could buy leap puts so all you could lose is the premium paid. However, the amount that you lose to time decay would probably outpace the price decay experienced by the etfs.

    So the only option I see is to buy bear put and call spreads using leaps. This way you can get as theta neutral as possible, and don't risk a margin call from a black swan event. However, this means you will have to guess how much these things will decay in two or three years (life of the leaps). You need to at least buy spreads where the payoff is you double your money or more. This way if one etf does not decrease because of some reason, the gains from the other will offset. To do this you will have to position this spread to where the breakeven and maximum profit is well below where the etf is currently at.

    So as you can see, there is no free lunch here.
    #10     Oct 10, 2009