Going long in both ultralong and ultrashort ETFs?

[crgarcia]

You buy 50% in ultralong ETF shares, the other 50% long in ultrashort shares.

An ETF can't go below 0
(and even if they did you don't get margin calls)

But ETFs can gain beyond 100%
i.e. BGU went from 18 to 63

So, what you lose in one ETF (ultralong/ultrashort), you get in the other (ultrashort/ultralong)?

 

[SomeYoungGuy]

Leverage ETF's trend toward zero, both the long and short ones. It has to do with their cost of leverage (slippage, commissions, roll forward losses and so on).

If the market is up, the ultralong makes just a little less then the short loses. If the market is down, the ultralong loses just a little more then the short wins.

If you shorted both, you should make money right? I have no idea if these can actually be shorted. If they can, I would like to know why that isn't guranteed money.

 

[WinstonTJ]

OP stocks can go from 10 to 40 as well does that mean i can buy two stocks and make money?

You are thinking about it wrong - and they are skewed to the downside.

 

[rew]

Quote from SomeYoungGuy:

Leverage ETF's trend toward zero, both the long and short ones. It has to do with their cost of leverage (slippage, commissions, roll forward losses and so on).

If the market is up, the ultralong makes just a little less then the short loses. If the market is down, the ultralong loses just a little more then the short wins.

If you shorted both, you should make money right? I have no idea if these can actually be shorted. If they can, I would like to know why that isn't guranteed money.

During sustained up trends it is possible for the leveraged long fund to go up more than enough to compensate for the leveraged short fund's losses. For example, if the short and long funds are each 2x funds, and the underlying goes up 20% each day for 4 days is a row, the short fund collapses 40% per day to 13% of its original value but the long fund grows 40% a day to 384% of its original value, more than making up for the annihilation of the sort side.

But you are right that the normal tendency of both long and short leveraged funds is to go down. If the underlying just oscillates up and down in a range for a long period of time both the long and short leveraged funds will go down, even assuming no commissions, no contango on the futures contracts, no slippage, etc. Add in those real world costs and the leveraged funds drop even faster.

 

[JJacksET4]

Quote from SomeYoungGuy:

If you shorted both, you should make money right? I have no idea if these can actually be shorted. If they can, I would like to know why that isn't guranteed money.

As mentioned by the last poster, it is possible for one side to rally strongly and cause a loss at least for the short term for your short.

For example, if XYZ (Long) was $50 and XYZZ (Short) was $50, and the index did really good, they could go to say XYZ $120 and XYZZ $20 - if you shorted an equal # of shares of both, you are now losing. Eventually, it would probably work out to being under $100 combined again however.

Quote from WinstonTJ:

OP stocks can go from 10 to 40 as well does that mean i can buy two stocks and make money?

You are thinking about it wrong - and they are skewed to the downside.

What you said about 2 stocks is true, however as the OP is noting, if a leveraged short or long ETF goes up, the other one should go down every single time - that isn't true with stocks. If FAS goes up in a day, you can be 99%+ certain that FAZ will be down that day (and by around the same amount - just check historical quotes) - no normal stock pairs are that consistant.

You are correct in general that they are skewed to the downside, but a strong run in one direction can push one up for a moderate term at least.

To the OP:

In general, instead of asking too many questions about these, I would recommend just going through the historical quotes and testing them - we have been through ups and downs now with the leveraged ETF being around long enough for both directions - it shouldn't be very hard to backtest them.

JJacksET4

 

[Bootsie]

Quote from SomeYoungGuy:

Leverage ETF's trend toward zero, both the long and short ones. It has to do with their cost of leverage (slippage, commissions, roll forward losses and so on).

If the market is up, the ultralong makes just a little less then the short loses. If the market is down, the ultralong loses just a little more then the short wins.

If you shorted both, you should make money right? I have no idea if these can actually be shorted. If they can, I would like to know why that isn't guranteed money.

The only way to make money with these things is to buy the long ETF and buy the short ETF in equal weighting when the market is trending UP... and visa versa when trending down.

 

[WinstonTJ]

Quote from Bootsie:

The only way to make money with these things is to buy the long ETF and buy the short ETF in equal weighting when the market is trending UP... and visa versa when trending down.

Trend is actually bad. $100 long and $100 short in a trend (with rebalancing) is going to yield a very good hedge.

You want a sideways, choppy market and then rebalance your positions often.

 

[MathAndLogic]

Quote from WinstonTJ:

Trend is actually bad. $100 long and $100 short in a trend (with rebalancing) is going to yield a very good hedge.

You want a sideways, choppy market and then rebalance your positions often.

Actually, volatility increases the downward drift of both inverse and leveraged ETFs.

That being said, if the tendency of inverse and leveraged ETFs is downward, why not just buy puts on them? Guaranteed money, right?

 

[traderlux]

Quote from Bootsie:

The only way to make money with these things is to buy the long ETF and buy the short ETF in equal weighting when the market is trending UP... and visa versa when trending down.

....i dont get it....

 

[WinstonTJ]

Quote from MathAndLogic:

Actually, volatility increases the downward drift of both inverse and leveraged ETFs.

That being said, if the tendency of inverse and leveraged ETFs is downward, why not just buy puts on them? Guaranteed money, right?

Too much premium built into the puts. Very little edge.