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Thinking about the best posts in 2012 got me thinking about the one post that I made that experienced a few recs.

2 Are Leveraged ETFs Horrible Investments? 82 Zeelotes http://boards.fool.com/Message.asp?mid=29761309

Here is a very simple way to trade the 3x ETFs that I thought some of you may find interesting. I recall from my post back then that the vast majority of responses sought to negate the benefit of using 3x ETFs. A pity since they have so much to offer if you are willing to take the time to explore them in more detail.

From the beginning of the Direxion 3x ETFs until now this strategy has produced a CAGR of 51.37%. The period is 11/5/2008 to present.

You start on the first day they are available and rebalance every FOUR weeks -- that is 28 market days. You can rebalance every two to eight weeks and the returns will be good, but I prefer four weeks for the sake of convenience and ease.

When VXO is at or above 19 you short two 3x ETFs at the same time: FAZ and FAS. At each rebalance date you check whether VXO is at or above 19 and when it is below you enter IWM instead.

94% of the time holding these two short produces a positive return using this method. In other words, only 6% of the four week periods produced a loss. In contrast, 65% of the four week periods holding IWM are positive.

The DDD3 is 0.51%.

The Dow has a return of 7.96% over the same time period.

What do you think? Worthy of a second look?
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Is there any difficulty in getting shares to short with these ETF's?
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You start on the first day they are available and rebalance every FOUR weeks -- that is 28 market days. You can rebalance every two to eight weeks and the returns will be good, but I prefer four weeks for the sake of convenience and ease.

How reliable were the returns over the other 20 starting dates?

When VXO is at or above 19 you short two 3x ETFs at the same time: FAZ and FAS. At each rebalance date you check whether VXO is at or above 19 and when it is below you enter IWM instead.

How did you come to choose 19?
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rharmelink asked:
How reliable were the returns over the other 20 starting dates?

When it comes to a system that is using timing such as this is it is not possible to adjust the date of each binary signal by one to twenty days. And as to adjusting the rebalance, as I said, anything from two to eight weeks works well.

How did you come to choose 19?

Just guessed. I have not tried any other levels, but you are certainly welcome to do so.
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rebalance every FOUR weeks -- that is 28 market days

Is this 28 calendar days or 21 market days?
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I tried to replicate your method, but I'm getting different numbers than you. But I'm just using adjusted closing prices from Yahoo.

Are you using next day opening prices based on the previous day ^VXO close?

My model gets even better results if you ALWAYS short FAS and FAZ. :)

When it comes to a system that is using timing such as this is it is not possible to adjust the date of each binary signal by one to twenty days.

Hmmm? If you start it on a Tuesday, with a 4-week rebalance, then there are three other Tuesdays you could start on with a 4-week rebalance. There are also four Mondays, Wednesdays, Thursdays, and Fridays in between that you could use as a starting date. So, actually 20 days in total.

If going from Wednesday to Wednesday (starting 1 day later) yields significantly different results than Tuesday to Tuesday, the method is probably not robust.

The period is 11/5/2008 to present.

Yahoo closing prices don't start until 11/19/2008 for FAS and FAZ?
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Is there any difficulty in getting shares to short with these ETF's?

And I'd add to that: is there any cost? As I recall, even when some stocks are shortable, a select few of them can have a pretty heavy borrow cost. And often the stocks with the heavy "hard to borrow" fees are the leverages ETFs. I think it's precisely because people have found out how to profit by shorting pairs.

An example at IB (http://ibkb.interactivebrokers.com/node/1146) gives a fee of 50% annualized. Now that's just a meaningless sample number, but it's interesting to note that it's roughly equal to the strategy's CAGR. Ah, just found a real (if old) example: FAS had a 24% in 2009 (http://wheredoesallmymoneygo.com/hard-to-borrow-fees/). Not as bad as 50% but it still makes a big - and sure - cut in returns.

The really pesky thing is that this is something we can't backtest. Short screens are already hampered by not knowing what stocks were shortable in the past, and I think the leveraged ETF situation just makes it even harder.

- Jamie
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As I recall, even when some stocks are shortable, a select few of them can have a pretty heavy borrow cost. And often the stocks with the heavy "hard to borrow" fees are the leverages ETFs.

It can be done synthetically by buying a put and selling a call using an at the money strike price.
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dsmcdougal wrote:
Is this 28 calendar days or 21 market days?

28 calendar days

rharmelink asked:
Are you using next day opening prices based on the previous day ^VXO close?

Three day average of the high prices only for VXO to determine the signal. And I don't allow a bearish signal to last less than one month, or a bullish signal to last less than a 1/2 month. This is simply to remove whipsaw.

My model gets even better results if you ALWAYS short FAS and FAZ. :)

The CAGR of ALWAYS is 5% less than this system, but more importantly, the DDD3, Ulcer Index, and every other variable is much worse.

Hmmm? If you start it on a Tuesday, with a 4-week rebalance, then there are three other Tuesdays you could start on with a 4-week rebalance. There are also four Mondays, Wednesdays, Thursdays, and Fridays in between that you could use as a starting date. So, actually 20 days in total.

Clearly, you don't have much experience with timing and testing models.

Yahoo closing prices don't start until 11/19/2008 for FAS and FAZ?

Yahoo data? Seriously?

Inception Date 11/05/2008 via
http://www.direxionfunds.com/wp-content/uploads/2012/10/FASF...

As to the other comments... it reminds me of the last time I posted on something like this. Close to 100% of the comments sought to negate the feasibility, but since this is the bread and butter of my own success in the market, arguing its validity is a waste of my time. Just because you haven't done it, doesn't mean that it can't be done.
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When VXO is at or above 19 you short two 3x ETFs at the same time: FAZ and FAS. At each rebalance date you check whether VXO is at or above 19 and when it is below you enter IWM instead.

Beyond my capabilities to backtest, but are there 3x ETFs that will short the market to avoid shorting FAZ & FAS. There are such vehicles that will short US Treasuries.
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Difference between VXO & VXI?
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I came across this today
http://seekingalpha.com/article/1066111-an-almost-risk-free-...
I'm trying to use my grandkids ipad.
pain in the whatever.
Rrjjgg
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Difference between VXO & VXI?
=== ===

One vowel.
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Clearly, you don't have much experience with timing and testing models.

LOL.

Ditto, if you don't think significantly different results based on varying the starting date would indicate a problem.

If a method gives me 50% CAGR by rebalancing every 4th Tuesday, but -8% CAGR by rebalancing every 4th Wednesday, something needs to be looked at as to why the two days are so different.

Three day average of the high prices only for VXO to determine the signal. And I don't allow a bearish signal to last less than one month, or a bullish signal to last less than a 1/2 month. This is simply to remove whipsaw.

Ahhhh. More rules. So you reported the results you achieved, but not the actual method you used. So no one else can possibly repeat the test.
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As to the other comments... it reminds me of the last time I posted on something like this. Close to 100% of the comments sought to negate the feasibility, but since this is the bread and butter of my own success in the market, arguing its validity is a waste of my time. Just because you haven't done it, doesn't mean that it can't be done.

Well you know, taking potshots at idea is kind of our MO around here :-). A healthy sense of skepticism is what keeps us in the game, and I expect this forum to be something of a peer review.

It wasn't immediately obvious from your original post that this was something you had actually done, though on a re-read I could certainly interpret it that way.

- Jamie
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Zeelots

From my reading, it appears that you have used this method of trading. What surprises me is that you traded without checking other levels than the VXO at 19. To invest money without checking the brittleness of the cutoff point seems that I am missing something.

Wouldn't the VXO level be a key criteria in the backtest?
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In reference to yet another post from Zeelotes, Rhameling very correctly points out :

"Ahhhh. More rules. So you reported the results you achieved, but not the actual method you used. So no one else can possibly repeat the test"

***************************

The lack of enough information to repeat tests from Zeelotes is a trademark of the posts of this person.
Sometimes the precise details are not disclosed ( "it is proprietary " ), some other times the source of the data is so obscure as to be inaccesible, or . . . something or another.
But . . . the results are always claimed to be spectacular.
One wonders: if a person claims to be able to make 50 % + returns per year, by now such person might own the universes, which does not seem to be the case.
That is the reason why I ceased reading those posts long time ago, except for their humoristic value.

Vizcacha
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rharmelink wrote:
Ditto, if you don't think significantly different results based on varying the starting date would indicate a problem.

Alright, I'm more than open to being educated on how to do an all-starts-test on a timing system.

On December 1st this year I shared this chart of one of my indicators. It is an indicator I developed quite a few years ago, and have been using ever since in my trading.

http://www.zeelotes.org/data/2012_IS.PNG

The strategy that I use to trade this is based upon:

1. Buy on an Extremely Bullish Signal (ignore new signals within one month)
2. Screen for the optimal 3x ETF to buy
3. Set a Limit Order 2.5% below the signal day's close price - if the order fails to be filled buy at market close
4. Sell when a fixed PROFIT LATCH is reached, or three months out from the signal, whichever comes first.

The signals from October of 2011 to present are:

1. 10/4/2011
2. 11/21/2011
3. 5/23//2012
4. 11/16/2012

Here are the results based on a variety of PL levels:

Profit Latch    ROI      CAGR    GSD   Sharpe  Ulcer Index  DDD3     BBW   Signal  % of Time  Drawdown
20.00% 107.67% 84.45% 39.24 2.13 1.98% 0.15% 444.19 100% 59.28% -13.70%
25.00% 144.50% 111.48% 43.52 2.22 2.00% 0.15% 586.38 100% 59.28% -13.70%
30.00% 182.72% 138.84% 46.65 2.37 2.05% 0.15% 728.94 100% 59.28% -13.70%
35.00% 183.39% 139.32% 51 2.24 4.21% 0.28% 390.58 100% 59.28% -13.70%
40.00% 204.75% 154.34% 52.62 2.34 4.25% 0.28% 431.88 100% 59.28% -13.70%
45.00% 226.90% 169.74% 53.35 2.45 4.25% 0.28% 474.96 100% 59.28% -13.70%
50.00% 249.83% 185.50% 53.72 2.57 4.25% 0.28% 519.07 100% 59.28% -13.70%
55.00% 273.54% 201.62% 54.22 2.68 4.25% 0.28% 564.18 100% 59.28% -13.70%
60.00% 298.02% 218.09% 55.53 2.76 4.26% 0.28% 610.27 100% 59.28% -13.70%


For the sake of illustration let me show how this turned out for the first buy signal on 10/4/2011. The 3x ETF selected was DRN. I set a limit order 2.5% below the close price of 10/4 and it was filled on 10/5. With a 60% PL the gain was reached on 10/27 and sold. The PL is also set using a limit order shortly after the order was filled on the day of purchase.

Now, my question to you is how do you do an All Starts Day test on this sort of system?

Now it may be that you'll say this system does not require a rebalance, while the other system does. But again, what you need to realize is that the rebalance makes very little difference in the ETF Pair system. You are simply redistributing the funds equally between two ETFs. What day that happens is meaningless. The fact that there is so little difference between two to eight weeks proves that out.

An All Start Days test is VERY important when you are dealing with fundamental data, but impossible with a test like I'm illustrating in this post, and irrelevant to an ETF Pair test.

More rules. So you reported the results you achieved, but not the actual method you used. So no one else can possibly repeat the test.

I share the details when I see a genuine interest. Plus, as you discovered with simply holding the pairs indefinitely, the actual details of this are also meaningless. Any method would work. Pairs held short do best during hight volatility periods in the market, and not so well during calmer periods. Whatever method you want to use to identify that will work.

What surprises me is that you traded without checking other levels than the VXO at 19. To invest money without checking the brittleness of the cutoff point seems that I am missing something.

Wouldn't the VXO level be a key criteria in the backtest?


Test it and you'll discover that any method will work. I simply chose this one. It is not central to the system.
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let me show how this turned out for the first buy signal on 10/4/2011...
Now, my question to you is how do you do an All Starts Day test on this sort of system?


I don't have a dog in this fight, but this seems kinda useless and silly.

A timing/trading system with results going back a whole 14 months? A period of time in which the S&P500 went up 27%, BTW.

Personally, if somebody came to me with this, I wouldn't even bother to verify the backtest even if it was easy to get the backtest data. At a minimum it would have to be tested in a bear market and a sideways market.

And a strategy which consists of shorting high-leverage ETFs? I'd be looking for some holy water and garlic.

Granted, I tend to be a curmudgeon, and I don't have a dog in this fight, so I don't care one way or the other... But the first thing that came to mind was an old quote:
"Stock market history is littered with people who misunderstood the risks they were taking on."
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Now, my question to you is how do you do an All Starts Day test on this sort of system?

Do you check for signals each day? If so, "all days" are already included.

"All Starts Days" are only a consideration for methods that are checked periodically.

Something that trades once a week has 5 possible start days -- if results are different based on whether you trade on Monday, Tuesday, ..., then it probably has an issue.

Something that trades once a month has about 30 possible start days. A lot do it on the end of the month. I've generally found there to be vast differences depending on which day of the month you choose. Typically, middle of the month, trading on the 14th thru the 17th of each month, appears to give the worst results. I've never figured out why. But if the day of the month has very little variance in returns, the method is probably more robust. But if it does vary by day, and you can figure out why, that may turn out to be a nice method in itself.

And so forth...to quarterly, annual, whatever.

On StockScreen123, most fundamental factors are updated every Friday. For any backtest, I can choose a number of periods. If I choose an 8-week rebalance period, I have 8 backtests to do. It's why I generally go to the lowest common denominator and just test weekly. If that can't perform well, it's unlikely any longer period will do well.
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A timing/trading system with results going back a whole 14 months?

You could actually simulate FAS/FAZ for a longer time period, using the assumption that they would accurately track the returns of the Russell 1000 each day.

For example, for 2005, ^RUI was up 4.4%. A daily 3X match would have been up 10.1% and a daily -3X match would have been down 17.5%.

I have no idea how well that assumption is achieved on actual daily data.
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rharmelink asked:
Do you check for signals each day? If so, "all days" are already included.

"All Starts Days" are only a consideration for methods that are checked periodically.


Yes, there are very few, if any, indicator that I've ever developed that isn't checked every day.

Is everyone else in agreement with this explanation? Mungofitch?

I certainly thought it a bit odd demanding an "All Starts Days" test on the sort of thing that I focus on in my research.

Thank you for your kind tutelage.
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I certainly thought it a bit odd demanding an "All Starts Days" test on the sort of thing that I focus on in my research.

Sorry. I didn't mean to make it sound like a demand.

It's just a standard question that comes to my mind when I see a method that trades on regular intervals of time other than daily, because I have occasionally seen vastly different results based on different starting dates of monthly methods. And such results bother me.

I did try different starting dates on my attempt to test your method (without the 3-day moving average of VXO). I generally got a CAGR of 24-38%, but had one or two starting dates that dipped under 10%. But that could just be my flawed implementation.
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You could actually simulate FAS/FAZ for a longer time period, using the assumption that they would accurately track the returns of the Russell 1000 each day. I have no idea how well that assumption is achieved on actual daily data.

Taking a quick glance at Friday's returns for UPRO vs SPY vs ^GSPC, there appears to be some significant discrepancies. ^GSPC is down -0.41% and SPY is down -0.37%. Triple the ^GSPC return would be -1.23% and triple SPY would be -1.11%. However, UPRO (3x leveraged S&P500) is down -1.36%. There also seems to be noticeable differences on longer time frames. (1 week)

It seems like creating a synthetic index of leveraged 3X and backtesting it that would be a bit sketchy in light of this.

I've personally been very interested in working with the leveraged ETFs ever since their inception, but the extremely short time they've been around has scared me away so far from backtesting. A four year backtest just didn't seem to provide enough historical data for me to feel comfortable trading on. Zee, do you have a different perspective on this?

As for the comments about Zee not sharing all of the details on this.. frankly, I'm okay with that. I value any ideas he's willing to share. Sometimes a simple pointer or nudge in the right direction can be immensely valuable to those people who are willing and have the time to brew ideas, test, and expand upon them theirselves. If a person dislikes the nature of his posts, it's simple enough to skip over them. It's not as if the MI board is overflowing with threads nowadays that a person must wade through to get to what they want to read.
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There also seems to be noticeable differences on longer time frames. (1 week)

Longer time frames are problematic because compounding is not additive.

As I noted the other day, if an index is up 1% one day and down 1% the next day (or vice versa), then the index and ALL bull AND bear ETF's based on it will also be down if they track accurately.

I've seen annual periods on SPY-based leveraged ETFs where you couldn't tell which was the bull and which was the bear. Or you'd be wrong on your pick because the leveraged bear ETF outperforms the positive return of SPY.
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Clearly, you don't have much experience with timing and testing models.

... it reminds me of the last time I posted on something like this. Close to 100% of the comments sought to negate the feasibility, but since this is the bread and butter of my own success in the market, arguing its validity is a waste of my time.

I share the details when I see a genuine interest.

Thank you for your kind tutelage.


As a mostly-lurker on the board, I've always enjoyed the natural skepticism prevalent here. It's a little sad to see such a strong and capable contributor have his ego bruised so easily. Zeelotes does a lot of things well, but condescension he does very well. I sure hope everyone agrees with (and praises) his future posts so he doesn't stop posting (it seems that's how he defines "genuine interest)).
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Is there any difficulty in getting shares to short with these ETF's?

And I'd add to that: is there any cost? As I recall, even when some stocks are shortable, a select few of them can have a pretty heavy borrow cost. And often the stocks with the heavy "hard to borrow" fees are the leverages ETFs.


____________________________________________

Zee,

In all the back and forth, I did not see a response to this.

I just checked on my Fidelity account and these ETFs are listed as 'hard to borrow' and 0 shares available to borrow. Anuual charges were listed as 3.35% and 6%, far below what Jamie indicated, but moot if you can't borrow them.

What broker are you using to trade these?
Can you do it readily?
What are the fee charges?

Thanks,

-Ernie
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"Is there any difficulty in getting shares to short with these ETF's?"

All (nearly all) these have inverse 3x ETF's. You simply buy the inverse, no need to short.

av8r
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Ernie asked:
What broker are you using to trade these?
Can you do it readily?
What are the fee charges?


1. Interactive Brokers
2. Follow this link:

http://www.interactivebrokers.com/en/?f=%2Fen%2Ftrading%2FSe...

In the search window type in: FAS

Choose Check Availability on the right for FAS. Right at this moment it is 100,000.

Now type in FAZ and choose Check Availability. It is also 100,000.

3. This will differ for each and every broker, and the actual cost will depend on the size you short. Read this for more explanation:

http://www.interactivebrokers.com/en/?f=shortableStocks

avi8r wrote:
All (nearly all) these have inverse 3x ETF's. You simply buy the inverse, no need to short.

The point of this is to short BOTH the bullish side and the inverse side at the exact same time.
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The point of this is to short BOTH the bullish side and the inverse side at the exact same time.

Yup. The idea behind this is to take advantage of a structural deficiency in how leveraged ETFs set up, which causes them to lose money over time.

By shorting both, you're (theoretically) market neutral, so the money you make is strictly from the deficiency itself.
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All (nearly all) these have inverse 3x ETF's. You simply buy the inverse, no need to short.

Wow. Be careful!

I don't believe that the inverse 3X is actually the same as being short the 3X. These things are devilishly complicated, which is why scads of naive investors got creamed when they bought inverse S&P ETFs.
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"It can be done synthetically by buying a put and selling a call using an at the money strike price."

rharmelink, can you elaborate on how this would be done?

Thanks
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can you elaborate on how [shorting an ETF synthetically by buying a put and selling a call using an at the money strike price] would be done?

Sure. I'll use the January expiration date for the options, since they are about a month out at this point. Note that selling calls requires a margin account, but so would shorting the ETFs.

Right now, FAS is trading at $119.49. Since we are expecting a decline most of the time, you could sell the first ITM $119 call at the current bid price of $5.90 and buy the first OTM $119 put at the current ask price of $5.85. So, part of the call is intrinsic value.

Right now, FAZ is trading at $15.23. So, again, first ITM $15 call has a bid price of $0.86 and the first OTM $15 call has an ask price of $0.70.

If you wanted, you could do both the call and the put at the first OTM or ITM, or mix them any which way.

Now, if the ETF price drops, the call expires worthless and the put makes you money -- similar to shorting the ETF. And, if the ETF price rises, the put expires worthless and at some point you'll need to cover the increased price of the call, costing you money -- similar to shorting the ETF.

But then your 28-day rebalance period would need to coincide with option expiration dates, which are at 28 or 35 day intervals. A separate backtest might be necessary to see if those rebalance dates give the same results.

In most of my monthly backtests of various timing systems, the option expiration month is one monthly period I test, as well as the various days of the calendar month. That's why I had asked about it.
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Oops...

Right now, FAZ is trading at $15.23. So, again, first ITM $15 call has a bid price of $0.86 and the first OTM $15 PUT has an ask price of $0.70.
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Right now, FAZ is trading at $15.23. So, again, first ITM $15 call has a bid price of $0.86 and the first OTM $15 PUT has an ask price of $0.70.

So you have a financial stock included in an ETF, which leverages the price movement through options, then a market maker sells retail options on the ETF. What could go wrong?

In theory you would just want to own puts on both since they tend to grind away, up or down. If the underlying goes up, the put value goes down but at a reduced rate due to inefficiencies. The other side goes down even more so, so the profit is the difference.

My guess: the option market makers know this and price accordingly, or price the spread accordingly.
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In theory you would just want to own puts on both since they tend to grind away, up or down. If the underlying goes up, the put value goes down but at a reduced rate due to inefficiencies. The other side goes down even more so, so the profit is the difference.

Then why not use the calls to pay for the puts?

In any case, the question was how to synthetically create a short position, since that is what was tested.

If you just buy the puts, you have to make sure that you recover enough to pay for their purchase -- which is a 5% cost for this first month.

So if you are only going to do one or the other, selling an ITM call might be a better way to go. Then you collect that 5% each month, although you're still exposed on the upside. But theoretically on only one of the two ETFs, since one is 3X bull and the other is 3X bear.

There are a lot of ways to play it with options, but I don't know of any way to test those plays.
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In theory you would just want to own puts on both since they tend to grind away, up or down. If the underlying goes up, the put value goes down but at a reduced rate due to inefficiencies. The other side goes down even more so, so the profit is the difference.

My guess: the option market makers know this and price accordingly, or price the spread accordingly.


Interestingly enough, of the 15 leveraged pairs tested in the article rrigg linked in post 240646 FAS-FAZ had the worse return over the past year (-14%).

DB2
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"It can be done synthetically by buying a put and selling a call using an at the money strike price."

rharmelink, can you elaborate on how this would be done?


He just did.

You want greater detail?

1) Take a look at the price of the stock.
2) Go to the list of currently traded options for that stock and pick the strike price at or just below the stock price.
3) Pick an expiration date from those available. Longer expiration gives more time for the strategy to work - does that help with this strategy?
4) Sell N call options and buy N put options, for that strike price and expiration.

By selling a naked call ("naked" meaning you don't have the stock sitting there to back up the call option), you have the same RISK as if you had shorted the stock - for a small reward that is known up front (the option premium).

You use the premium from that option to buy a put, which exposes you to the potential REWARD from shorting the stock - at a small risk that is known up front.

By picking a strike price below the current stock price, you pretty much guarantee that the premiums you collect by selling the call options will be greater than the premiums you pay to buy the put options - which will at least help on brokerage commissions, and may have money left over.

Note: I have NO COMMENT on whether this is a good idea or not.
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These things are devilishly complicated, which is why scads of naive investors got creamed when they bought inverse S&P ETFs.

Actually they aren't at all. Some basic understanding and application of math is useful however. Actually reading the fact sheet as a minimum and prospectus preferably will do wonders as well. (Though I grant you reading the prospectus is about as fun as a root canal and as interesting as watching the proverbial paint dry.)

I do agree with your basic point about investors getting creamed...preventable however.
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