If SPY drops 34% intraday but recovers by market close, will SPXL bankrupt?

C

Cyrix

This question is related to 3X leverage ETFs.

If the underlying asset drops more than 33.3% intraday but moves back up by market close, would the 3X ETF go bankrupted because of the intraday drop?
Or, will it survive, because the drop of the daily closing price is less than 33.3%?

Is the answer different for 3X ETNs?
Thanks.
 
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I really doubt an ETF would go bankrupt under the scenario you presented because they are using the leverage from futures contracts. The 2X & 3 X ETFs did fine during the big flash crash we had back in 2010.

Stocks and ETF's have price bands at several levels that will halt trading if the NMS BBO crosses these thresholds. Try Googling LULD (limit up/limit down) for all the details.
 
I suggest you do a web search on the ETF name you have in mind with the word "prospectus", or, better yet search on https://www.sec.gov/edgar/searchedgar/webusers.htm .

For example, from a little web searching for the SPXL S&P 500 3X leveraged exchange traded fund, I see tjat Direxion's June 15, 2016 statutory prospects for at SPXL, TNA, ERX, TECL, TYD, TMF, LABU, SPXS, TZA, ERY, TECS, TYO, TMV and LABD, according to http://direxioninvestments.onlinepr...-6-15-16-PRO/DailyETF-3X-Supp-6-15-16-PRO.pdf includes the following text on the fifth page of the PDF (the unnumbered page immediate before page before the table of contents):

"If a Fund’s underlying index moves more than 33% on a given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money. The Funds’ investment adviser, Rafferty Asset Management, LLC (“Rafferty” or “Adviser”), will attempt to position each Fund’s portfolio to ensure that a Fund does not lose more than 90% of its net asset value on a given trading day. The cost of such downside protection will be limitations on a Fund’s gains. As a consequence, a Fund’s portfolio may not be responsive to underlying index movements beyond 30% on a given trading day, whether that movement is favorable or adverse to the Fund. For example, if a Bull Fund’s underlying index was to gain 35%, that Fund might be limited to a daily gain of 90%, which corresponds to 300% of an underlying index gain of 30%, rather than 300% of an underlying index gain of 35%."
More...

The language about the gains also being limited makes me think that these particular funds might be selling very high calls in order to buy very low puts to pay for some downside protection. If they are, my guess is that these would be entirely or mostly off-exchange trades made with the opposite Direxion fund covering approximately the lower of the net asset values of the two funds (for examples, SPXL with SPXS).

Edit: Clarifying that last sentence, I mean that there is probably some standing contract between the various Direxion funds to do this automatically, not that staff at Direxion negotiate and sign such contracts between their funds each day, but it's complete guesswork on my part.
 
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Hahahhhahahah drop 34% in one day????


Hahahaha



That's impossible... You could have WW3 and ww4 together ...you could have a meteorite slam into the ocean creating the biggest tidal waves the world has ever seen and Facebook could go bankrupt all in one day and the s$p wouldn't even fall a 1/3 ....

Guess you weren't around in 2001 when the markets were SHUT DOWN for over a week! Yes they weren't open. So not only do they have those pathetic circuit breakers in place to curb all the possible selling at once, but they would shut the markets completely down so you wouldn't be able to sell your portfolios all at once.....the chances of a 34% drop is 0% now go buy all the SPXL possible.....bankroll every bit of money you have and make free money!!!!!

Hahah s$p dropping 34% in one day...that made me have a good laugh....
 
toonerdy said:
I suggest you do a web search on the ETF name you have in mind with the word "prospectus", or, better yet search on https://www.sec.gov/edgar/searchedgar/webusers.htm .

For example, from a little web searching for the SPXL S&P 500 3X leveraged exchange traded fund, I see tjat Direxion's June 15, 2016 statutory prospects for at SPXL, TNA, ERX, TECL, TYD, TMF, LABU, SPXS, TZA, ERY, TECS, TYO, TMV and LABD, according to http://direxioninvestments.onlinepr...-6-15-16-PRO/DailyETF-3X-Supp-6-15-16-PRO.pdf includes the following text on the fifth page of the PDF (the unnumbered page immediate before page before the table of contents):



The language about the gains also being limited makes me think that these particular funds might be selling very high calls in order to buy very low puts to pay for some downside protection. If they are, my guess is that these would be entirely or mostly off-exchange trades made with the opposite Direxion fund covering approximately the lower of the net asset values of the two funds (for examples, SPXL with SPXS).

Edit: Clarifying that last sentence, I mean that there is probably some standing contract between the various Direxion funds to do this automatically, not that staff at Direxion negotiate and sign such contracts between their funds each day, but it's complete guesswork on my part.
More...

This is really the best answer, though I think the options contracts were structured and traded with the investment banks being the counter parties rather than between the opposite funds.
Thank you.
 
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