Buying FAZ or Short FAS?

Is there any difference/advantage to buying FAZ or can you just short FAS for pretty much the same result?

 

It is easier to buy FAZ than to short FAS.

 

why is that?

 

He who sells what isn't his'n, Must buy it back or go to pris'n

 

I’ve been playing around with ETFs for a while and thought about a way to generate a considerable profit from them. Option traders are familiar with time decay but it also applies to leveraged ETFs. This ETF time decay is a result of the fund management fees, leverage financing interests and other expenses. Since November 2008, there are 2 interesting funds for this strategy: The Direxion Financial 3X ETFs. FAS is long the financial market and FAZ is short the financial market, both using 300% leverage. These ETFs are very popular and are traded in the tens of millions shares a day which make them good candidates for short selling.

While I was looking around for information on this strategy, some people rightfully said “they cannot go both to 0”. This may be true but that’s not the object of this strategy. Here, we want to re-hedge the positions daily to balance the dollar amount on FAS and FAZ. This way, we profit from the downward bias on both funds and we are hedged against the market since the net delta of this position is near 0 and readjusted to 0 every day.

The strategy is: everyday, at close time, balance the positions on FAS and FAZ to have the same short dollar amount resulting in a net delta of 0.

These are some interesting results! Excluding slippage, and margin requirements, this would yield a compounded annual 87% return. If your broker allows it, you can put the money for the margin requirement in a T-bill for a small return on that unused amount. This clearly shows that holding FAS or FAZ long for more than a few days is a very bad idea: it will eat through your cash.

 

You might be missing 1 thing. Proshares made a huge dividend on Dec 23. Look at a daily chart of TWM to see. It was nearly 35%.

This came as a huge surprise to everyone holding their double-short funds. Being short TWM, you would need to cough up the cash to pay this dividend.

I don't believe FAS and FAZ have been around long enough to force a payout. But one morning they suddenly will.

* as a side note, Proshares screwed up the timing of the payment. They dropped the value of TWM on December 23, but didn't pay out the cash to holders for 7 days later. Massive margin calls ensued. Hopefully they will do a better job next time.

 

in the long run this strategy will be profitable but when I say long run I mean loooong run. There's no free lunch here. You will have to be able to withstand huge drawdowns and commit further capital when one side of the market is trending otherwise you will risk geting margin called out at an adverse time.

When FAZ and FAS both debuted FAZ went from 60 to 200 while FAS went from 60 to about 11. Shorting both when they debuted would have resulted in a net loss of 150% in the first 3 weeks! A lot of people would have got margin called out of this position before it could have resulted in gains.

In addition, when one side of the market is steadily trending the results can be catastrophic because you can see one of these etfs gain about 1000% while the other tanks 98% resulting in a net loss of -900%!! This is what happened to the prices of the betapro double short and double long crude ets respectivly after the peak of the oil bubble last yr. This is an extreme example but as we have seen, markets do go to extremes from time to time.

 

Your advice back on the 12th was great. I'm also hoping to see FAZ rebound to $8, however, since it's coming close to 3 weeks I thought it wouldn't be a bad idea to see what your thoughts are as of today. I picked up 3,000+ shares today around $4.95 and was initially thinking about selling all around $5.30 but part of me wants to sit on at least a portion of the shares for a bit, assuming it'll go up to at least around $7. Your thoughts? Thanks again for the great write-up and dialog to those who replied. Take care..

 

I know you think you have found the holy grail, but you are playing with fire.

Try doing this strategy in a trending market. Not only will you lose your shirt, but these etf's will most likely go reg show, forcing you to cover at any price your broker can get, right when all liquidity leaves the marketplace. Backtest jan'09 through march '09, for example. Even the backtesting losses will underestimate the risk though. SKF was trading above $200, at a -60% carry rate in mid march 2009, for instance. It was one of the most fucked up stock carry situations I've ever seen.

If you trade this strategy, be sure to take your profits off the table when you can. Eventually you are guaranteed to blow up.

 

Although I haven't been investing in FAS/FAZ for long, I have been trading the market for awhile - and I just need to remember that if I keep my wits about me (as well as a little extra cash) I can find a way to turn around the bad trades - usually.
I am hoping for more volatility. If so, then if FAZ goes up, I can sell. If not, then at least I may get a really good price doubling down. Remember Scarlett:
"After all, tomorrow will be another day."
Ha! Does it seem to you that things might turn around tomorrow afternoon? Maybe? (I hope so...)