I confess I have dabbled in SDS. Mostly to offset losses in accounts I can't reach. However I am wondering- what are the real risks here on owning any of these, and what are strategies members on this board have undertaken?I was thinking of picking up ultrashort funds (to help stop this rally) with trailing 5% stops. If this were held over a weekend, how bad could it be?It looks like prospective ETF's are:USPIX - ultrashort NASDAQSRS - ultrashort real estateSKF - ultrashort financialsSDS - ultrashort S&P 500SIJ - ultrashort industrialsOf course, recognize these are 2x negative losses.However, it seems like option trading has become "weak" in that the volatility is so high that PUTS are super expensive. So I have concerns in the underlying explosiveness of these funds (is there a chance they could "blow out" way past the index, for example, magnifying a 5% gain in the index into a 20% loss in the investment)http://online.wsj.com/article/SB122368284470624993.html?mod=......The above article talks about how expensive options are getting, which may make the returns on ultrashorts fall way short of the negative index. This depends on their implementation strategy.Here is an article proposing now is the time to buy stockshttp://online.wsj.com/article/SB122645226692719401.html?mod=......The upcoming world summit may kick some energy into the stocks, as certainly the outcome will be promises of massive capital injection into the economies. However I don't think this summit will fundamentally affect the real problem- no one wants to lend, and without lending, we are on a massive compression.Comments welcome, especially from people who have been burned on ultrashorts. (with advice) (X-post to Macro economic trends)
Hi yttire, I've been burned by these Ultrashort ETF's but have also profited, net result has been a small profit over the last month. My main struggle has been capital allocation, i.e. investing too much at once.With these ETF's the swings can easily take your trailing stop out. What I've tried to do instead is determine where support/resistance are in the underlying index, then basing my Ultrashort buy/sell on the index hitting that signal. Not perfect but seems to keep me from getting whipsawed around.One example: I've profitably traded in and out of DXD (Ultrashort DJIA) by looking at potential short-term trend changes in the DJIA (see the trendlines I drew here: http://www.freewebs.com/wmills/djia-daily-111208.bmp). Based on this diagram I've taken about 75% of my position off the table in anticipation of another bounce up toward 9500 (if I'm wrong then I'll have to console myself with the profits I've banked :) )CF(rank speculator)
Thanks for your comments.Yes I have the same problem - moving too much capital too quickly and getting burned (but on the long side). So I have no doubt I can achieve the same thing on the short side.However, it seems like there is a lot of bad news coming out now which is providing a consistent climate of negativity about the market. It seems like the government doesn't know what it is doing, and the entire banking disaster may unfold as feared.In this climate, it seems like shorting is less risky, but events within a day could certainly switch the climate. However, a stream of pieces of news about layoffs from companies from all sectors seems to be painting a bleak picture (although honestly positive in the sense of companies remaining in business). However bleak from a consumption point of view.Economic news has a way of taking one by surprise though, and the market reaction is unpredictable. I was thinking of staging into shorts in larger and larger positions, always "playing on the house" money.For example, day 1, take on $1,000 in shorts with a 5% stop. If this position is up by 10% at the end of the day, then you have $100 of "house money" which allows you to take another $2,000 in shorts with 5% stops. Thus, only increase the position based on historic success.The problem is it can backfire big time across the night, and another problem is that the market moves a lot at night making the best time to be holding across some bad news stories. The big gain to be had on a short is often going to be made holding it across the night, but the fantastic loss is also to be found there.
Yes, I have tried this sort of thing and finally decided that it was basically gambling.
Someone is always left holding the bag. This is the same concept as the oft quoted patsy at the poker table.If you invest late into trends then you have a higher probability of being that patsy. People investing late in trends should examine if they suffer from herd mentality, confirmation bias etc. While numerous studies show momentum strategies are successful, all those strategies attempt to identify major trends early on. one of the most basis the death cross of the 50dMA crossing over the 200day shows when getting on board tis trend was appropriate http://finance.yahoo.com/q/ta?s=^GSPC&t=2y&l=on&...yttire. you initial post in this thread spelt out a good case for not going short right now. Stepping into a trade as yttire explains is a great trading strategy. Most traders I have read recommend a similar strategy and even long term investors express similar sentiment in phrases like water the flowers and pull the weeds. As you're talking about a 5% stop, we're talking short term. Have you worked out the probabilities? The only tools that I know which are any use at giving you an edge over the short term are sentiment and chart based. If you use those tools then you may also want to layer on some historical fundamental analysis. From that it seems likely we're at fair value now. While markets often overshoot and hence lower prices are a possibility, the probability of lower markets are reducing. There is no need to swing at every trade. Is this a time when you think you have a high probability of success with an ultra short?
People investing late in trends should examine if they suffer from herd mentality, whatismyoption One needs to become a contrarian just before a trend ends and reverses. :)That is difficult but one can also change tactics as the trend peaks or bottoms.To bring it into context of this board, Jim BuildMWell attempts to buy just before the downdraft reverses while IcyWolf attempts to buy after the downtrend has reversed. A market crash like the present one can ruin the early buyer. Was Buffett too early with GE and GS?Don't kick yourself too hard. Goldman Sachs bought FMD at $15 and it is now a dollar and change. They are supposed to be the experts! They are good enough to be chosen as Secretaries of the Treasury. hahaha At least Buffett acknowledges that he does not know in which direction the market will move in the short term but as long as you are sufficiently protected you have the means of waiting out the downdraft. Buffett is earning 10% for his waiting it out, not to shabby.This thread is about shorting. I don't like the risk/reward proposition of shorting stocks but shorting covered calls has been good for me in this downdraft. Right now prices are so far down that I don't see any new opportunities for selling covered calls on my portfolio.Denny Schlesinger
To bring it into context of this board ....Like many of you (I suspect) I've bought a few great deals before they become much greater deals. I began last summer to hedge my longs with groups of ultra-short ETFs in the appropriate sector. The gains from the shorts soon overwhelmed the losses from the stocks. Eventually I got rid of many of the new purchases (LTBH-R-US--not) and kept the short positions.The shorts are the only thing I have had this year that have been consistently profitable. Call me foolish, but my accounts (all but 1) are up YTD (barely.)When I get more back in the market, the positions will be hedged with ETFs again until a solid trend is established. Even though markets change quickly (I saw a $17k drop yesterday because I was net very short) I don't see the risk if you are using the ETFs as I started out using them, that is to balance new positions with ultra-shorts.Maybe I'm unique (guaranteed, Icy says) but sometimes, in the short term, my conviction that the market or a sector will go down is much stronger than it is that any particular stock will go up. At those times, I have to short them. :)Dan
Was Buffett too early with GE and GS?Did Buffett actually buy GE and GS stock? People with his level of assets normally buy convertible bonds. If the credit rating is dropping, those bonds will yield upwards of 10%. He is guaranteed a minimum of 10% per year on his investment, and a conversion price somewhat lower than the market price at the time of the investment. If the company survives and prospers, he can convert the bonds to stock at the conversion price and bank a huge profit. If the company stagnates and the stock price does not recover, he is happy to collect his 10% interest. Buying convertible bonds significantly reduces risk. The only way he gets burned is if the company defaults on its debt.
Did Buffett actually buy GE and GS stock?mhm6487 Buffett bought preferred shares with a 10% dividend and warrants to buy shares at more or less the then current price. This is more or less like buying convertible bonds.Denny Schlesinger
Denny,Buffett bought preferred shares with a 10% dividend and warrants to buy shares at more or less the then current price. This is more or less like buying convertible bonds.I think he should have just bought a convertible.......like a BMW or even one of those collectible Chrysler's that are no longer made...8^)I'm just sayin'........... might have been more enjoyableWooly
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