Dude nice attitude, I nearly fell out of my chair laughing
Can 2X ETF's go to zero?
- Thread starter FCostella
- Start date
Dude nice attitude, I nearly fell out of my chair laughing
The answer is yes.
Macroshares oil down went to zero this summer. (DCR)
http://seekingalpha.com/symbol/dcr
Macroshares oil down went to zero this summer. (DCR)
http://seekingalpha.com/symbol/dcr
This was not an ETF in the traditional sense like UYG. The NAV (net asset value) of the oil was worth zero... so it went to zero. That was the only asset in the portfolio. Oil above 120 made it worthless and each dollar below that was worth .33. The UCR was the opposite of the DCR and the two stocks combines could not have a value of more than 40 dollars. So if oil was 60 bux. DCR and UCR both would have traded at 20 dollars each.
Plus ... there were strike prices and then time decay factored in, that would not have taken place if the oil didn't trade above 112 for 3 consecutive days. This triggered distribution of the fund which made it go to zero.
It is conceivably possible that C BAC JPM and every other stock in the index go to ZERO... but it is highly unlikely... therefore it wont go to zero.
The SKF is the opposite of the UYG. If the SKF is up 4%, than the UYG is down 4%. At least it should be pretty close to it. Lay a chart over it and you will see they are inverse of each other.
Banker
Did I say that?? No I didn't, did I? But, nice try.
What they do have is swaps that are somewhat like synthetic shorts, but have asymmetric return characteristics relative to a true short position. Whereas a short position can lose more than its position size, the swaps that ProShares short funds enter into can only go to zero, due to a regulatory regime laid down by the SEC. That means they have an embedded option. For the Ultra funds, obviously that embedded option becomes quite significant.
I'll give you the punchline:
Close to, but not exactly, zero. Which makes them options.
A few years ago, just for the heck of it, I calculated the time decay on some ProShares funds based on historical price data. It turned out to be several percent per year, above and beyond the management fees of course - I don't remember the exact numbers.
For SKF with the sky-high volatilites involved, the time decay is likely to be much higher, though piggie2000's estimate of 25-40% seems out of the ballpark to me. Just off the top of my head, I would guess more like 8 - 12%. Nonetheless, there is absolutely no question that time decay represents a significant factor in the returns of these funds.
Your assertion that leveraged ETFs aren't options is dead wrong -- they have significant embedded options and hence time decay like any option.
Martin
Again, there is very little impact due to time decay, most likely NOT A few % a year. Go look at how much options 50% OTM cost, not a few % of notional, that's for sure!
The few % you see are probably increased transaction costs, due to the fact that the portfolio has to be adjusted every day, and the fact that options have higher slippage.
ALL you are getting with ultra ETFs are delta 2 for your money. There is a negligible amount of gamma, theta, and vega, a small amount of rho, and some exposure to dividend risk and borrowing costs.
The few % you see are probably increased transaction costs, due to the fact that the portfolio has to be adjusted every day, and the fact that options have higher slippage.
ALL you are getting with ultra ETFs are delta 2 for your money. There is a negligible amount of gamma, theta, and vega, a small amount of rho, and some exposure to dividend risk and borrowing costs.
I'm glad to see that you are conceding the point that the Ultra ETFs contain embedded options.
As to the amount of time decay, a one year 50% OTM call on XLF will cost you several percent. As you correctly point out, dynamic hedging adds to that cost. Ultra ETFs are not pure delta.
Martin
demoship you're full of shit.you're a clown ass. before you open your big ass mouth do your fuckin homework. i'll use the example of skf and xlf
SKF (2 X FINANCIAL ETF) XLF ( 1 TIMES FINANCIAL ETF)
FEB 21ST $112.20 $26.62
AUG 5TH $112.12 $22.54
no erosion my ass. xlf declined about 18% in 6 months yet the 2x
etf bear fund skf was unchanged. thats 18% of erosion in 6 months.if skf and xlf flatlined for 6 months the erosion could be even greater.there's risk assumed to get 2x's.
SKF (2 X FINANCIAL ETF) XLF ( 1 TIMES FINANCIAL ETF)
FEB 21ST $112.20 $26.62
AUG 5TH $112.12 $22.54
no erosion my ass. xlf declined about 18% in 6 months yet the 2x
etf bear fund skf was unchanged. thats 18% of erosion in 6 months.if skf and xlf flatlined for 6 months the erosion could be even greater.there's risk assumed to get 2x's.