Why not some of each? All of these are poised for gains at some point in the next few years. I like the energy sector too.
Could someone explain to me with the time decay involved in 3x ETF's how you cannot just short both sides of the ETF(ie FAS and FAZ) and make money? Thanks. UT
Two great water plays with good dividends, WTR and AWK. Both held up extremely well during the market drubbing (AWK just recently started to take a hit). Also a big fan of Unilever (UL or UN whichever you prefer), Clorox (CLX), and Diageo (DEO) in the staples sector. Nice dividends and solid products.
Sure. Look at a chart of FAZ and ask yourself if you could afford the pain and margin as FAZ went from 40 to 115 in 19 trading days. Other than that, the concept works.
Jeb, You get the equity buildup on the short of FAS though even though you are losing on FAZ in your scenario. Won't this keep you from getting a margin call? Furthermore, what would be keeping a very conservative investor from shorting both with plenty of cash set aside in the account(to keep from margin calls if there were any)as well and reaping 2-5% on his/her money for the year?
You're right about this strategy requiring "plenty of cash", in the case that one of the two ETFs (most likely FAZ) rallies by a large amount. However it all really depends on your definition of "plenty of cash". What if, in a really really bad situation, FAZ goes not just from 38 to 115, but all the way to 230? or 380? Essentially a strategy of twin-shorting FAS and FAZ requires you to assume that you have enough of a cushion to withstand a huge rally in FAZ. However the moment that the cushion is exhausted, is when you're stuck in a margin call - just when it could be a good opportunity to short FAZ.
I think the OP's core idea is correct with regard to the financials. I don't agree with the use of FAS for all the reasons stated in the thread. The idea of acquiring XLF makes the most sense to me, especially from an options play standpoint. I never liked put selling, but selling puts against XLF makes sense as a way to acquire shares over time in anticipation of a move up. The average IV for 30-60 day options is around 95%. With IV that high it makes sense to be a net seller of premium. So for instance you could sell the APR 6 put on XLF for 0.39. If you want to be more aggressive, you could sell the MAR 7 put for 0.44 or the APR 7 put for 0.78. The idea is that you're long term bullish and want to acquire shares to hold. Selling puts lets you collect premium to basically give you a discount to buy those shares. If you keep selling puts every month, you'll either collect premium and no shares if it expires OTM or you'll acquire shares at a discount. Do it every month and you'll be scaling into a long term larger position over time at a discount. Once you've acquired 1000+ shares you can get fancy and start collaring the position. But that's a separate discussion.
Thanks for mentioning this. What I meant was in the context of timing. Say if you bought one of these leveraged ETF's and it tanked on you by $40 because you bought it at $100; you would have a much better chance at buying something like FAS in the $2 or $3 range if we were close to a "bottom" -- that is considering in the first place you wanted to take on this kind of risk. Here is a random tidbit. Several folks mentioned selling some out of the money puts on XLF............ How about this one?? The Jan 2011 $3 strike FAS puts are going for $1.70 by $1.90. If you sold these, they would put your break even price at $1.30. Would this be a complete crazy trade :eek: ?? Discuss
For FAS/FAZ, that has been exactly the right thing to do. Unfortunately, one of them is now trading at $3 and room for shorting is scarce. So what happens next is...not completely clear.
That's essentially the same as shorting XLF puts, with the added risk of not really knowing how an ETN priced this low is going to behave. For example, what happens if the thing reverse-splits and overnights back to a reasonable dollar value in absolute terms?