ultrashort etfs and free money

Discussion in 'ETFs' started by dumb_mother, Oct 21, 2008.

  1. ok, so i was thinking about it and i think i have a free money situation, so can someone tell me why i'm wrong please.

    so assume you buy 1 barrel of oil at 100$
    and you buy ultrashort oil for 50$

    if oil goes to 50, ultrashort goes to 100
    150=150=no loss (ignoring fees)

    if oil goes to 200, ultrashort goes to 25?
    150<200-25=175=25-fees in profit

    does the neutralizing of the unlimited losses from natural shorting through whatever the ultrashort etfs use that makes it a finite loss also make it a free money situation?

  2. priceman


    There is no such thing as free money in the markets.
  3. Fund me an ultrashort oil. And don't say DUG, because thats incorrect.
  4. l2tradr


    HOD on TSX. Nymex Crude Oil futures for the next delivery month.
  5. no ultrashort is actually 2x. usually its more like 1.4x and you gotta think about whats underlying, which I believe is options and swaps.

    and adjustments for net asset value
  6. l2tradr


    Intra-day 2X, you know what I meant.
  7. DTO

  8. The original assumptions are incorrect to begin with.

    If oil goes to 50, ultrashort goes to 100
    ie.. %change in ultrashort is -2*%change in oil.

    here the change is -50% oil
    and corresponding change in ultrashort
    = 100% or -2*-50%

    Ok, I buy that.

    However, if oil goes to 200, that is a +100% incremental change. Meaning ultrashort instantly went to -2*100% = -200% = -50
    not +25.

    Any incremental change at or beyond 50%, means ultra short is zero or less.

    You also have to take path dependencies into account, once you get that part down. Even in theory, there is no free lunch. Same problem exists in any type of hedge (even at 1X).

    If your original conjectures were somehow correct, don't you think there would be 99.9999% of traders making risk free fortunes by now?
  9. that's why i asked- i knew there was a hole somewhere it was to easy to be true. i didn't realise the ultrashorts could actually go to zero, i thought as it continued it would simply continue to follow the other product 2x% wise.