Holding 3x etf long term
- Thread starter highrisk
- Start date
I suppose you could say: a trader who holds a leveraged ETF throughout multiple trading days is not only making a directional bet on the underlying holdings in the fund, but is also making a bet on the path/choppiness (or lack-there-of) on a daily-basis that the pricing action takes on the way "there" (wherever "there" ends up being.)
Not something I care to wager on, personally.
More "choppiness" on a daily-basis equates to more "decay", and less choppiness with multiple days of "follow-through" in the same direction results in very fast compounding of gains or losses.
There's no free lunch though... some traders may seek to capture the "decay" due to "choppiness" by shorting both sides of a bull and bear leveraged ETF... but such is usually reflected in the high cost to borrow such instruments, and the generally high price of options on these products.
Not something I care to wager on, personally.
More "choppiness" on a daily-basis equates to more "decay", and less choppiness with multiple days of "follow-through" in the same direction results in very fast compounding of gains or losses.
There's no free lunch though... some traders may seek to capture the "decay" due to "choppiness" by shorting both sides of a bull and bear leveraged ETF... but such is usually reflected in the high cost to borrow such instruments, and the generally high price of options on these products.
So it is different from buying leveraged etf risk which is dropping to zero only for the worst case.
Choppy decay is one thing, contango decay is worse.
I think you're being too specific for the more general query of the OP. He was speaking of 3x ETF in general I think...
With Vix ETFs / futures it's another world, because the contango effect is a lot bigger than in say normal equity ETFs and futures.
What 3x ETF do you rather be long compared to what futures strategy? Because there's a fair bunch out there. Are you talking about a long position in a 3x ETF VIX SHORT vs short position in VIX Futures?
Contango is a big deal for some 3x etf too. 3x bull oil etf decay is an example. Yes vix is an extreme example. Sp500 3x etf is an "ok" option while it has benefit from a trend market but not chppy, while you can put 100% cash in it without taking the more than drop to zero risk.
I think there's not much difference in equity. You will into a similar problem when having a 3x ETF valued at 100k vs futures valued at 300k... margin system will kick in and mean you will probably be forced to liquidate the futures before you're down 100k on those (assuming you have 100k balance to start with).
Negative of futures is that you're forced to roll them when holding long term. Negative of 3x ETF is costs associated with them... plus choppy decay...
When there is 1 day crash like 1987, future lost is instant without possible cut.
Well... at 33% it's a total loss... so 1987 that one day wasn't, since it was... what.. 23?... over the days before and after, yes... total loss.
But with 3x ETF, at -33% normal market you're down 100% as well... so same position, but you're still in the game indeed.. If you would have a few dollars left with the futures trade... you could swap to buying the 3x ETF and be long again.
EDIT... hmm.. I wonder... if the market falls 40%... the 3x ETF is at minus -20% assets. Because it drops 120%... So is the ETF also total loss and completely liquidated? So basically... you're actually out of it as well? No position since it will not trade anymore?
Yes, was talking only in the context of a wide and deep stock index consisting of large bluechips stocks, like S&P 500 or Dow Jones Industrials. Wide in the sense of many constituents and deep as each has a large market cap which have dampening the effect of selling, takes lots of volume to make it move.
As we are talking about overnight risk, the most I see these indexes gap down at opening is 4-5% in the worst case, that is a -15% hit on equity before one gets out of the position (if you do not exit in pre-market prior to open).
VIX, Gold, Oil, etc. is a different area, these instruments are more dangerous with leverage. they can move heavily with no leverage.
As we are talking about overnight risk, the most I see these indexes gap down at opening is 4-5% in the worst case, that is a -15% hit on equity before one gets out of the position (if you do not exit in pre-market prior to open).
VIX, Gold, Oil, etc. is a different area, these instruments are more dangerous with leverage. they can move heavily with no leverage.