Newbie to trading this. Can someone, in baby talk or close, explain how an ETF price changes from market close to the following market opening (independent of the actual price of the underlying)? How would I explain this to a non-investor?
Inverse ETF Decay
- Thread starter EdmondsInvestor
- Start date
Its simple math. Lets talk about a 2x etf
IF, the price of the index is $100, and it goes down10%, its now worth $90
THEN, The 2x ETF will go from $100 to $80
IF, on day 2, the index goes up 10% again, the index goes up to $99
Then, the 2x goes up 20%, and the index is now at $96
Now multiply this choppy price behavior over days, weeks, or months, and you'll see the decay in action.
IF, the price of the index is $100, and it goes down10%, its now worth $90
THEN, The 2x ETF will go from $100 to $80
IF, on day 2, the index goes up 10% again, the index goes up to $99
Then, the 2x goes up 20%, and the index is now at $96
Now multiply this choppy price behavior over days, weeks, or months, and you'll see the decay in action.
Take it as a gift from the market and only short those instruments with conservative size. Even if you are wrong on the underlying instrument time and decay will be on your side.
Ugh....no, that doesn't work. The short rates on some of these are over 100%! That's money that gets pulled out of your account everyday btw.
Yes, it is priced into the puts. No free money.