FAZ/FAS math

Hello all,

I just came around this topic and I have an interesting idea. Most probably people already thought about it, but just in case..

We want to take advantage on the fact that over time, both of them lose value. However, shorting both of them is not good since in sharp move, your loss in rising etf is bigger than your gain in falling etf. Going long is not good as well since in sideways market, they both will lose.

So why not to but bearish diagonal spread on both of them? For example, sell fas aug 40 put and buy oct 49 put. Same for faz. The idea is to have the short put (which is the maximum profit point) around 10% lower than current price in both spreads. That's about 30% profit if unchanged, and profit in the etf that falls should be bigger than loss in the etf that rises.

What am I missing?
 
Interesting idea, but you did not mention is when you intend to close out the trade, and what you do with the October option position after the August expiration.

Furthermore, let's suppose that the RFIN falls by a large amount, which means that FAS falls by a lot and FAZ rises by a lot.

So let's assume that at August expiration FAS is at 20 and FAZ is at 90.

So even though you will have a nice profit on the long Oct 49 put, you will have a large loss on the Aug 40 put.

What's more, you would have a large loss on the long FAZ October put, only somewhat offset by a small gain on the short FAZ August put. All in all, I would expect that the net gain on the FAS trades would not be enough to offset the net losses on the FAZ trades.


Quote from akivak:

Hello all,

So why not to but bearish diagonal spread on both of them? For example, sell fas aug 40 put and buy oct 49 put. Same for faz. The idea is to have the short put (which is the maximum profit point) around 10% lower than current price in both spreads. That's about 30% profit if unchanged, and profit in the etf that falls should be bigger than loss in the etf that rises.

What am I missing?
More...
 
The action on august expiration depends on the price of the underlying. Ideally I would like to roll the short puts to September. If the move is big, I might roll the whole spread.

If fas/faz loses/gains 50% as you mentioned, the position will probably have a small loss. However, this loss will be probably less than just going both short or both long. Statistically, it doesn't happen too often, and the gains in the months that they move "only" by 10-20% should be much higher than occasional small losses when the moves are very big.

I think that statiscticaly the odds are in my favor. I will track the position for a while and see what happens.
 
I've noticed an oddity with IB's margins and FAS/FAZ.

Has anyone noticed that their overnight margins are the same as their day margins?

In effect this means that if you were so inclined (and crazy enough :D ) you could hold 3x+ margin overnight, rather than <2x.

An algorithm fluke due to the recent reverse split, or have they changed their policy?

Which should be against SEC rules, correct?
 
I trade five ETF (bull/ bear) pair.
I am always long the bull or the bear the switch is simultaneous.
I trend trade. On the OptionsHouse trading platform I can predefine my trade based on a stock or index, (price), trigger.
In a side-wise market that lacks a good trend or risk/reward potential, I stay long both the ETF and it's inverse and during market panics.
Draw down is small. Limited to ETF (slop) and ask-bid spreads. It is recovered in a day or two? The big money is made during the long runs.
My positions are sized to: (1) 2% max risk per trade. (2) 1/3 of account balance each position.
Most trades last from 4 to 10 days based on market conditions.
My pairs: ERX/ERY, FAS/FAZ, TNA/TZA, BGU/BGZ, URE/SAS. (In order of preference).
I usually follow only 3 pair due to computer chart display limitations.
 
The IB site describes how to help offset the volatility slop when holding a 3X position for more than one day.
On occasion I am long both the ETF and its inverse for days.
As explained on the IB site I re adjust to keep the bull and bear position at same dollar value. When the trend is established I close the downtrend side.
If there is a large down day, that leaves the uptrend intact, I add shares to bring the held position back to its pre-drop dollar value.
(see IB web site for specific details)
 
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