Shorting FAS and FAZ(a simple study)

Discussion in 'ETFs' started by urrterrible, Mar 14, 2009.

  1. Hey I posted my question in another topic but here it is again and I created two excel sheets and the results were educational.

    Why not just short FAS and FAZ(3x Russell 1000 financial index). You win by the decay!

    I learned this works for choppy markets like ours, but if there is a trend you get HAMMERED!!!

    Russell(RIFIN) is now at 452 last time it was there was Jan 20th, roughly 36 trading days.

    Had you shorted both FAS and FAZ you would have made 33% on FAS and 54% on FAZ. Investing $30,000 into each short you make a total of $26,000. Hell YEA!!!!

    But wait...

    Had in those 36 trading days the Russell(RIFIN) go up 2% every day here are the results. You lose on FAS 625% and you win on FAZ 88%. You would have LOST(assuming no margin calls) $161,000.

    Does this sound correct, crazy shit, sorry if this is stuff you already know, it was a learning experiment for me.

    I don't think I will be doing this, lol.

    If you were to do this would it be better to do this by buying puts on both sides, or selling calls, or shorting the actual stock?

    Also do you pay interest on the money from the short selling even if the stock moves in your favor?
  2. Another question and sorry for throwing so many questions out there, but there are a lot of intelligent people here and I like to learn from them.

    Let's say I like to look at a past chart of FAS and FAZ and see that every time FAZ hits 80 I should short it. Well when the Index it follows was at 452 on Jan 20th and FAZ was at 88ish I short it and make money. Now months later the index is at 452 and FAZ is at 40ish. Does this mean my new short price is at 40 and the short price at 80 no longer exists?

  3. faz


    But what's the likelihood that it goes up every single day for 36 days straight? Even if its trend is up over the period, it's bound to go through some ups and downs. So, I wouldn't totally dismiss your trading idea.

    Another strategy to investigate is to buy puts on both faz and fas.
  4. This idea seems to make a lot of sense.
  5. jnorty


    This question is getting old. everyone and there mother knows that all these etfs erode over time and go to zero but quess what? you can't stay short them over long periods of time. The demand to short these etf's is incredible and THEY WILL BE CALLED IN OVER A SHORT PERIOD OF TIME. do you want to be short faz at $40 and it runs to $80 and you get it called in? as dirty harry says"do you feel lucky punk"
  6. "you can't stay short them over long periods of time."

    That is why I was wondering if anyone thinks if this thing stays choppy if the eroding factor will out weigh the premium you would pay on the puts maybe?
  7. faz


    You can always take up short positions synthetically using options. Availability of the shares to short probably isn't the problem.
  8. Follow up the discussion, I just backtest this and also on QID/QLD pair.

    The surprise result on QID/QLD pair back test shows that this strategy get opposite result from 2006 to mid 2008 which is co-incident with the bull market.
    Since FAS/FAZ only has history in bear market, the data is inefficient.

    At the same time, I checked Direxion website and the leverage is coming from swap. Looks to me that swap will not cause that much time decay as someone mentioned time decay for the leveraged ETF. If time decay is the case for leveraged ETF, how can we explain the QID/QLD pair actually go up in the bull market?
  9. didilidum


    Actually if QLD/QID have continually decayed overtime despite bull or bear market. Just check on the google stocks and plot both of them. -50% over the life of conception.