If SPY drops 34% intraday but recovers by market close, will SPXL bankrupt?

Discussion in 'ETFs' started by Cyrix, Jan 25, 2017.

  1. Cyrix


    This question is related to 3X leverage ETFs.

    If the underlying asset drops more than 33.3% intraday but moves back up by market close, would the 3X ETF go bankrupted because of the intraday drop?
    Or, will it survive, because the drop of the daily closing price is less than 33.3%?

    Is the answer different for 3X ETNs?
    Last edited: Jan 25, 2017
  2. ET180


    Won't the circuit-breaker kick in by then and limit max daily loss to around 10%?
  3. comagnum


    I really doubt an ETF would go bankrupt under the scenario you presented because they are using the leverage from futures contracts. The 2X & 3 X ETFs did fine during the big flash crash we had back in 2010.

    Stocks and ETF's have price bands at several levels that will halt trading if the NMS BBO crosses these thresholds. Try Googling LULD (limit up/limit down) for all the details.
  4. Robert Morse

    Robert Morse Sponsor

    I'm not sure why any ETF would go "bankrupt" from movement or lack of movement. An ETF might one day de-list from lack of interest.
  5. toonerdy


    I suggest you do a web search on the ETF name you have in mind with the word "prospectus", or, better yet search on https://www.sec.gov/edgar/searchedgar/webusers.htm .

    For example, from a little web searching for the SPXL S&P 500 3X leveraged exchange traded fund, I see tjat Direxion's June 15, 2016 statutory prospects for at SPXL, TNA, ERX, TECL, TYD, TMF, LABU, SPXS, TZA, ERY, TECS, TYO, TMV and LABD, according to http://direxioninvestments.onlinepr...-6-15-16-PRO/DailyETF-3X-Supp-6-15-16-PRO.pdf includes the following text on the fifth page of the PDF (the unnumbered page immediate before page before the table of contents):

    The language about the gains also being limited makes me think that these particular funds might be selling very high calls in order to buy very low puts to pay for some downside protection. If they are, my guess is that these would be entirely or mostly off-exchange trades made with the opposite Direxion fund covering approximately the lower of the net asset values of the two funds (for examples, SPXL with SPXS).

    Edit: Clarifying that last sentence, I mean that there is probably some standing contract between the various Direxion funds to do this automatically, not that staff at Direxion negotiate and sign such contracts between their funds each day, but it's complete guesswork on my part.
    Last edited: Jan 25, 2017
    murray t turtle, Sig and TraDaToR like this.
  6. S2007S


    Hahahhhahahah drop 34% in one day????


    That's impossible... You could have WW3 and ww4 together ...you could have a meteorite slam into the ocean creating the biggest tidal waves the world has ever seen and Facebook could go bankrupt all in one day and the s$p wouldn't even fall a 1/3 ....

    Guess you weren't around in 2001 when the markets were SHUT DOWN for over a week! Yes they weren't open. So not only do they have those pathetic circuit breakers in place to curb all the possible selling at once, but they would shut the markets completely down so you wouldn't be able to sell your portfolios all at once.....the chances of a 34% drop is 0% now go buy all the SPXL possible.....bankroll every bit of money you have and make free money!!!!!

    Hahah s$p dropping 34% in one day...that made me have a good laugh....
    lawrence-lugar likes this.
  7. really, ww3 , nukes going off, and you dont think the s&p could drop a measly 34%?

    i say you're wrong
    murray t turtle likes this.
  8. algofy


    That's limit #1, it has to take a breather but can travel further down.
  9. algofy


    Although highly unlikely, assuming limits don't stop it I would assume anything is possible.
  10. Cyrix


    This is really the best answer, though I think the options contracts were structured and traded with the investment banks being the counter parties rather than between the opposite funds.
    Thank you.
    #10     Jan 25, 2017