Short vix future would lose more than 1000%
Holding 3x etf long term
- Thread starter highrisk
- Start date
Short vix future would lose more than 1000%
Backtest of this portfolio is really interesting.
In Portfolio1, I shorted twice 3xbear vs 1 time 3xbull, So it is effectively long 3xbull etf. In Portfolio2, I went long SPY 3 times (similar to futures) and both portfolio's are rebalanced monthly.
So it is better to use levered ETF vs futures atleast in bull market. Even in mini bear scare of 2011 levered portfolio did well. Obviously one can not borrow at T-bill for levered ETF, even applying for margin penalty of 6% year it is better strategy. Either that or i am missing something.
Maybe or maybe not. It depends on your nominal account size if you're trading futures.
I actually just posted this in a different thread. Consider an account size of $10,000:
One contract of ES since Nov 8 2017 = ~$24,000 profit
$10,000 of UPRO since Nov 8 2017 = ~$7,000 profit
Maintenance margin on ES is $4,500 right now so a $10,000 account could withstand a 3.8% drop in the S&P 500 before getting margin called.
I guess you could consider ES to currently be up to 9x leverage if you've only got the bare minimum in your account.
You are right about just for holding long futures vs long levered ETF.
Question I was asking from Ryan81's post was whether it is better to get exposure on long side by shorting Levered ETF because of "choppiness" or "decay" of levered ETF. From the backtest results Ryan81 is right.
Here I have included 3 scenario's based on monthly rebalancing,
Portfolio1= Just Long UPRO
Portfolio2 = Short UPRO 1 times and short SPXU 2 times, so effectively you are long 1 UPRO
Portfolio3= Lever up SPY 3 times, so it represents UPRO. Levering up SPY is similar to ES.
Results says it is free lunch (atleast for now) even after including margin cost
Question I was asking from Ryan81's post was whether it is better to get exposure on long side by shorting Levered ETF because of "choppiness" or "decay" of levered ETF. From the backtest results Ryan81 is right.
Here I have included 3 scenario's based on monthly rebalancing,
Portfolio1= Just Long UPRO
Portfolio2 = Short UPRO 1 times and short SPXU 2 times, so effectively you are long 1 UPRO
Portfolio3= Lever up SPY 3 times, so it represents UPRO. Levering up SPY is similar to ES.
Results says it is free lunch (atleast for now) even after including margin cost
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What is the average short inrerest rate of UPRO and SPXU? That would be an impact in backtest even if we assume there are always stocks available to short.
It is just a theoretical exercise. You are absolutely right, it does not take into account "hard to borrow" issues or short rates.
For this exercise, short rates are just T-Bill rates. There is no other way to incorporate other short rates. My statement about "Free lunch" came from differences in CAGR is large enough to allow hefty short rates.
I also mentioned, something is missing in this analysis in my first post in this thread. Perhaps others can look into it.
http://bit.ly/2gBELHc
For this exercise, short rates are just T-Bill rates. There is no other way to incorporate other short rates. My statement about "Free lunch" came from differences in CAGR is large enough to allow hefty short rates.
I also mentioned, something is missing in this analysis in my first post in this thread. Perhaps others can look into it.
http://bit.ly/2gBELHc
Lets say the short interest rate is 6% each while a lot of 3x etf rate is over 10%, your Portfolio2 annual cost is 18%. Portfolio1, 3 doesnt need to rebalance, so Portfolio2 would be a lot of ask/bid cost for each re balance in and out. So together is like 20%. It looks like you need 3 times the money for Portfolio2 to product your result in graph.
Uhm... Vix doesn't go to 90-110 that easily... But 3-5 fold yes.. quite possible. And a 1 month vix future... I don't think it ever traded above 40 to be honest... can't recall it getting higher than that during GFC.
1987 was around 140. Future would be like 70% of it which is around 100. This was within a day.
There's no difference between them. You just have a bigger position with 1xES compared to 10k UPRO.
At the start... Nov 8 2016 (I assume you meant '16) ES was about 2100. So a drop beyond 5.2% would mean you can't post margin anymore, since than you would've lost 5.5k
In UPRO you would've lost 1.560.
It's actually equivalent, since with 1 ES future you trade 105k underlying value (at 2100 spot) and 10k worth of UPRO that's 30k worth of underlying value. So the ES position is actually 3.5x as big as the UPRO position. Which translates into the difference in P&L... 3.5*1560=5500
You can't just say, UPRO is better than 1 ES future... the leverage is different. Your end P&L also adds up to this, 3.5*7k=24k... more leverage = bigger swing.
When you can't post the ES margin anymore... you still have 4.5k left.. which you could invest in any other long position.