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ETF Questions...... 2x, 3x, ETN, etc. ??
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ETF Questions...... 2x, 3x, ETN, etc. ??

  #11 (permalink)
Market Wizard
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Rubens View Post
Suppose an investor purchases a leveraged ETF for $100.00 and it ends the day up 10% at $110.00 and the investor realizes a 2x profit of 20%. The next trading session, the leveraged ETF falls 9.1% from $110.00 to $100.00 and the investor realizes a 2x loss of 18.18%. While this doesn’t sound all that bad on the surface, an 18.2% loss on $120.00 amounts to $21.84, which puts the position at just $98.16. In effect, a loss is realized on what would have been a neutral position

True or ?

Very true.

A google search of "Leveraged ETF Decay" will reveal/explain a lot.

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  #12 (permalink)
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Behold this glorious chart over the short life of the Most Savage Beast.
Leverage decay. Over 5 billion dollars up in smoke.

If they had not been doing a reverse split every few months these shares would be about a nickel apiece now.

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  #13 (permalink)
Market Wizard
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I've been reading a lot about this recently. I assume the shares are unshortable otherwise the whole world would be short them.

Leverage ETF'd decay at it's best.

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  #14 (permalink)
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It's difficult to get the shares to short sometimes, but people do short them. I think IB frequently lists it as one of the most shorted ETFs. From what I hear, though, when VIX gets up there they start tightening up the margin requirements on this. Liquidity can be a problem when Vol spikes, too, so you could get caught pretty bad.

If you are an even more bold pilot you just sell call options. You can always do that even if there are no shares to short. But the same caveat applies. It's the most egregious example of the danger of selling options. I think could be more dangerous than VIX calendar spreads.

My risk manager will not allow either of these trades!

Only safe way to play it is long duration call spreads.

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  #15 (permalink)
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Futures Edge on FIO
suko,

What please, do you mean by ( long duration call spreads ) ?

Do you mena BullCalls , BackSpread, Ratio spreads ?

Thanks so much

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  #16 (permalink)
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Short call vertical.

Normal duration would be to buy in the back month, about six to eight weeks from expiration. With UVXY go an extra month out.

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  #17 (permalink)
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As a side note, it's worth learning and getting permissioned for options just to be able to add the short call technique to your toolbox. Because it makes it possible to short even when you cannot borrow the shares themselves, and furthermore there is a hard cap on your risk to the upside. So short squeezes are less dangerous.

It's the safe way to short these high-SKEW products like UVXY or JNUG.

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