I think "decay" may not be the best word to use around option traders. If I'm not mistaken, what the OP refers to is the fact that these leveraged ETFs track the daily returns of the index, and hence their multi-day return is path-dependent. In other words, they don't track the index on a multi-day level.
I don't know - look at past values for FAS/FAZ - there were times when both ETFS were much, much higher then either of them are now. For example, look around end Nov. 08 - FAS was 30 something and FAZ 50 something. Actually, I think an interesting though is to consider ATM or slightly ITM puts on both and/or other bear/bull ultra 3X ETFs. They do seem to lose value in the long run, which will then offset your put decay. JJacksET4
Two sample points does not a trend make. FAS and FAZ try to duplicate *daily* performance, which to me means they re-adjust for proper delta every day... and looking at longer-term results just not relevant. Considering the huge leaps (up/down) we've had with the financials over the last 6 months... I don't think you can draw *any* long-term conclusions. Calling this thing decay (suggesting a continuing trend) just doesn't seem correct to me. I mean, FAS was trading at $2.60 at the beginning of March... while FAZ was trading at $100. That has to do something non-linear and "funky" to the relationship. If Direxion is doing their job correctly, financials going up by 25% from that point would translate into FAS increasing by 50% (to $3.90) while FAZ drops by 50% to $50. The arithmetic average of the two all of a sudden drops to $26 from $51. Is that representative of decay? Not in my book.
1) Your book requires much editing 2) Direxion IS doing its job correctly. The problem is that far too many individuals simply do not understand how these doubles and triples work. If a 3x fund goes STRAIGHT UP BY 25%, then yes, the price will be 50% higher. But if, as is typical in the markets, there are up days and down days, and if that 25% rise occurs after many such up and down days, I guarantee that the ETF price will be significantly lower than +50%. It might not even be higher at all. That's how they work That's how they are designed to work That's how Direxion makes them work. They tend to track much less bullisly than the uninformed trader (that's you) believes. That's the way it is. If you choose not to believe, nothing can be done. But you can get in touch with Direxion and ask them Mark
dagnyt, You're pretty harsh in your response to my post, when you don't seem to have any idea what I said, or what my belief is. I also believe Direxion is doing their job correctly.
You said this: "If Direxion is doing their job correctly, financials going up by 25% from that point would translate into FAS increasing by 50%" These two items are true: 1) Direxion is doing what it supposed to do. 2) FAS would not move higher by 50% in the circumstances you describe (unless it did so with zero down days). Bottom line: these triples do not behave as too many people think they behave. When the underlying doubles in one day, then the triples rise as they should: from 1 to 6. But if it doubles over two months - with lots of ups and downs, the triples don't come near to moving 6-fold. It's possible they could decline in that scenario. Direxion currently makes an effort to tell investors that these triples are designed for day traders and NOT for long-term investors. In this case, long is very wrong. Mark
Anyone shorting both ETFs (FAS/FAZ) in equal value will make tons of money (mathematically proved and back-tested by almost every 'not so dumb' trader). And the only people who can always SHORT them are "Direxion" ;-) Everyone else lose in long run. Your broker may let you short both ETF at the same time but you are most likely to get short-cover call immediately. Madoff should have done something like this. A guaranteed and legal way to run scam. People with small account fall for this trap as simple stock rarely makes enough return to cover the commission cost and make decent profit. But "pattern day trader" rule makes them investor in these 3x funds. So it is not tough to guess who is at the bottom of this food chain. In my opinion, anyone without "day trading" account should not be allowed to trade these ETFs. My 2 cents. - Su
Heech, Mark answered alot of the items so I won't repeat them. I have seen some days where for example if financials are up 5%, maybe FAS goes up 14.80% and FAZ goes down 15.2% for example. At that rate, they will lose. I haven't watched it closely to know if they ever have days where they overall gain more then they lose. I think the reason they lose is because of time decay and expense on the options/futures they buy to attempt to get the 3X gains. If XLF one day is at $10 and FAS and FAZ are $10 - three months later if XLF has gone up and down and is back $10, I think FAS and FAZ are likely at that point to both be under $10. Honestly, I am interested to see what they do with FAS/FAZ - I think they might have to consider a 5 or even 10 to 1 reverse split at some point. JJacksET4
I don't remember the details but there was an article a while back that indicated (with supporting data) that the leveraged ETF's do not correlate exactly, eg. 2:1 or 3:1 and that using them for hedging or hedging them was problematic.