Negative Leverage trap question

Discussion in 'ETFs' started by nravo, Jan 26, 2009.

  1. nravo


    Long term, is there any reason to hold a 2X or 3X ETF, long or short? Let's say, no. So given that (with a few exceptions) it's not a good idea to hold them long term, because of the leveraged negative compounding on down days, why not just short them long term, and let them dissolve. Caveats?
  2. It is not possible to predict a longterm bear position with reliability. Bear markets tend to be short, aggressive and unpredictable.

    Many times, when people try to take a short position after a large downward move, they end up losing money as the market snaps back.

    Longterm bulls, yes the market over the decades generally goes up.

    Truthfully, the market is not really predictable more than a few hours or a day or two out. No one knows where it will be in 3 months or a year. People confuse their opinions with knowing more than the market does. When they are right, they blow their horn. When they are wrong, they clam up.
  3. nravo


    Wasn't really what I asked ...
  4. Why not short them long term?

    Because they spike big and a broker can call back your borrowed shares at any time.
  5. nravo - YES!!! you are on to something - the answer is to short the pair because over time, daily compounding causes the NAV price to decay. You will see a much more rapid decay price with the 3x than in the 2x, but its still there. By shorting the pair, you can offset your margin call with gains from the opposite pair.

    Right now I have heard that all the 3x shares are max short - meaning you'll have a hard time finding shares to borrow because others have already caught on to this strategy.
  6. nravo


    Figures. I did some 2X stuff today. Dipped my toe in. We'll see what happens.

    Hedgies got a name for this type of trade? Is it a spread trade? Market Neutral? Arb or some sort?
  7. nravo


    Call backs an issue? Never had it happen in all my years.

    Availability always seems to be the issue, especially nowadays.
  8. AAA30


    IB had FAZ available today.
  9. nravo


    What is the long part of the spread?
  10. FAS is the long part. Both FAS & FAZ had a price of $60 at inception back on election day (they launched that week/day). If you had shorted both at $60 you would be up ~$40 on FAS and even/slight loss on FAZ.

    Nice to see that IB had shares. They may get snatched up but you never know. I don't know if the shares outstanding is a public thing or not...
    #10     Jan 26, 2009