and shorting an inverse (short) equities ETF probably involves more risk than shorting a long ETF, because stocks generally crater faster than the rate at which they can climb
as m22au asked - what is +EV??? you are getting into the game too late IMO. look at the opening NAV/Price which was $60 back on election day in November. If you had shorted both then at $60 it would be a totally different ball game - now it works just the same though, if FAZ goes up 50% you go from $10k to $15k (you would be out about $5k) but when FAS goes down 50% then you go from $10k to $5k and you are in the money $5k so you are fine - the math is very simple the key is that you need to short equal dollar amounts not equal number of shares, etc. Problem is that most of these are already at max short (or more) and there are no shares to short or most firms don't allow shorting. Why not use options which inherently have price decay?
Just curious as to why you would use NAV instead of the current price at the time of the trade? thanks Tony O
If you need to ask this you have no business doing the trade. Simulate it on a spreadsheet and you'll have a quantitative answer as opposed to the imaginary crap floating in people's heads.
I've done this via simulation on several websites and as part of my desktop trading software. The main problem for me was already mentioned, you need a rather large reserve to be able to handle the rather large swings to either side and to avoid a margin call when you can least afford one. again, can someone tell me why use NAV instead of trade price? -Tony O
Tony, It doesn't really matter - the NAV and price will nearly always be less than 3% different to each other. If they weren't, someone would create / redeem for a risk-free profit. http://www.direxionshares.com/etf/fbu_3x_shares.html?daily;funds=fas eg. recent close at 6.86 was 10 cents (less than 2%) below the NAV of 6.96.
How is that possible? The FAZ is based on swaps of the Russell 1000 Financial Services index. If you plot the index and FAZ on top of one another you can see the bottom in the index made on 1/20/09 was near the 11/21/08 bottom while the equivalent high in the FAZ was about 50% of the earlier high. Since Russell only reconstitutes their indexes once a year it seems likely that there's going to be some upper limit to the FAZ as the index continues to drop in value. IMHO, anyway...
FAZ could easily go to 380. All it would take is a steady, sustained decline in the Russell 1000 Financial Services Index. Do the math, it's simple...not rocket science.