2 ETF Deathwatch Questions

[dcwriter2]

Has anyone ever tried going short (if possible) or long puts on some of these comatose products? Any research on such a strategy?

What happens if you are holding a long PUT ITM when one of these goes extinct? I'm sure this happened, no? (I presume the short ETF positions are just walk-aways, no?)

Tks in advance.

 

[systematictrader]

Has anyone ever tried going short (if possible) or long puts on some of these comatose products? Any research on such a strategy?

What happens if you are holding a long PUT ITM when one of these goes extinct? I'm sure this happened, no? (I presume the short ETF positions are just walk-aways, no?)

Tks in advance.

i think they liquidate you and give u some cash sort of similar when there is a reverse split and it results in fractional shares

 

[guru]

Trading leveraged ETFs is a very common topic discussed everywhere (here, SeekingAlpha, online articles), so plenty of info on it. I buy puts on many of those too.

Not sure what happens upon liquidation, but usually you have couple weeks to close your positions. While during liquidation the options may be priced based on the current ETF price and zero vol.
Each liquidation comes with rules on what happens, while you can contact the ETF issuer as well.

 

[ironchef]

Trading leveraged ETFs is a very common topic discussed everywhere (here, SeekingAlpha, online articles), so plenty of info on it. I buy puts on many of those too.

Not sure what happens upon liquidation, but usually you have couple weeks to close your positions. While during liquidation the options may be priced based on the current ETF price and zero vol.
Each liquidation comes with rules on what happens, while you can contact the ETF issuer as well.

I thought in equity options, CBOE acts as a middleman and guarantees the transaction for both parties?

 

[David's faith]

Since you are long a put you have the right to always sell some pieces of the ETF to anyone else whenerver ypu feel l up to. If the ETF is in liquidation you are still able to execute the right. The question is wheter you are still able to buy a ETF in order to excercise thw put.

 

[Sig]

Since you are long a put you have the right to always sell some pieces of the ETF to anyone else whenerver ypu feel l up to. If the ETF is in liquidation you are still able to execute the right. The question is wheter you are still able to buy a ETF in order to excercise thw put.

I'm too lazy to search the options clearing corp site but there's a rule that allows you to cash out your puts if the underlying goes away.

 

[guru]

I thought in equity options, CBOE acts as a middleman and guarantees the transaction for both parties?

So actually the OCC would announce some settlement price, settlement rules, and take care of options settlement, usually in the form of cash being the deliverable (like on an index). I just thought the ETF issuer would be the one determining the settlement price, and provide any other information if needed.

 

[dcwriter2]

Given the percentage of these dogs that actually do disappear, anyone thought about the pros and cons of going long puts on them or shorting? Or are options rarely available on them and shorting availability and fees make it uneconomic?

 

[guru]

Given the percentage of these dogs that actually do disappear, anyone thought about the pros and cons of going long puts on them or shorting? Or are options rarely available on them and shorting availability and fees make it uneconomic?

Pros: yes, you can short them using puts and put spreads. Some aren't very liquid, but you can still get fills around mid-price or otherwise reasonable price, especially if you wait and the price moves a bit in both directions.
Here is quick example of puts that more than doubled in value in the last month:

Cons:
- ETF decay is priced into options, so you won't always get great deals (unrelated to liquidity or fees).
- Some of those ETFs can get restructured, for example from 3x to 2x, 2x to 1.5x, or can start utilizing different investment schemas than previously - thus making your bets/puts no longer working under the same assumptions as originally, and/or later being repriced.
- Those liquidation events discussed above don't mean the ETF will end up at $0. Not sure what happens if you have $5-strike puts and the ETF gets liquidated at settlement price of $6. Possibly you could lose the whole bet.

 

[Sig]

Pros: yes, you can short them using puts and put spreads. Some aren't very liquid, but you can still get fills around mid-price or otherwise reasonable price, especially if you wait and the price moves a bit in both directions.
Here is quick example of puts that more than doubled in value in the last month:
View attachment 228188

Cons:
- ETF decay is priced into options, so you won't always get great deals (unrelated to liquidity or fees).
- Some of those ETFs can get restructured, for example from 3x to 2x, 2x to 1.5x, or can start utilizing different investment schemas than previously - thus making your bets/puts no longer working under the same assumptions as originally, and/or later being repriced.
- Those liquidation events discussed above don't mean the ETF will end up at $0. Not sure what happens if you have $5-strike puts and the ETF gets liquidated at settlement price of $6. Possibly you could lose the whole bet.

If it gets liquidated above your strike, your put option expires worthless. That's a good point you make, liquidation doesn't necessarily mean bankruptcy and a $0 price like it usually would for a stock. If anything the chance of early termination of your option decreases the value of your option since the time value is such a big part of the option value and it could be cut short.

I'd also clarify that the only "decay" priced into options is decay for fees and persistent tracking errors. What most people mistakenly call "decay" on leveraged and inverse ETFs and ETNs is their misunderstanding that the fund tracks the DAILY percentage return of the index, not the index itself. Since this creates a path dependency that can sometimes result in the ETF returning more than the underlying index over time as well as less, it wouldn't/couldn't be priced into options.