Is it possible to short ultra ETFs the old fashioned way and not by buying short ETFs

[user83248324]

Hey guys, thanks for taking the time to look at my question.

When recently looking at all the 2x and 3x ETFs issued by proshares within the Thinkorswim platform, all had the "hard to borrow" sign shown. Because of this, I am wondering if these ETFs are not allowed to be truly shorted because of the ultra and 3x short ETFs that "mirror" them or can they actually be shorted and it is just too hard to find any shares to short on any of these ultra and 3x ETFs.

Thanks again.

 

[WinstonTJ]

user,
they can be shorted just like anything else. I've seen a lot of hedge funds get cheap leverage by shorting a 3x short and using the proceeds + margin to buy into a 3x long - yielding 9x leverage.

It depends on your ToS inventory - do they have the shares to borrow so you can short?

Also - why wouldn't you want to just be long the short ETF rather than short the short ot vice versa?

 

[Haroki]

Quote from winstontj:



I've seen a lot of hedge funds get cheap leverage by shorting a 3x short and using the proceeds + margin to buy into a 3x long - yielding 9x leverage.

You lost me here.

Can you explain a little more what they do?

It looks like you are saying that they go long by shorting the short and buying the long?

Wouldn't that still give you just 3x leverage?

Or am I missing something?

 

[trom]

Quote from Haroki:

You lost me here.

Can you explain a little more what they do?

It looks like you are saying that they go long by shorting the short and buying the long?

Wouldn't that still give you just 3x leverage?

Or am I missing something?

Short 100$ worth of the triple short ETF = 300$ long side exposure.

Use proceeds from short sale to buy 100$ worth of triple long ETF = 300$ long exposure

Use margin on cash from short sale to buy another 100$ of long ETF = 300$ long exposure

So, with 100$ they get 900$ long side exposure.

Is that correct winston?

 

[WinstonTJ]

rather than using a number of shares lets use round numbers in dollars.

Example is BGZ & BGU (3x Russell 1k Bear & Bull).

Short $5,000 of BGZ = effectively now long the Russell 1k, $5,000 in a 3x fund = $15k exposure. By shorting you generate $5,000 income, which is cash and marginable. Margin accounts usually give 2x buy power, so now you can turn your $5,000 short sale proceeds into $10k buy power.

Buy $10k into BGU (3x Bull Russell 1k) = $30k market exposure

Now you have $15k in market exposure by shorting BGZ and $30k market exposure buying BGU on margin with short sale proceeds, $15k + $30k = $45k which is 9x $5k.

I would not recommend doing this as practice – there are better instruments such as futures, but many Funds, Advisors, etc. can not trade options or futures in their clients accounts so this is a cheap way to get 9x leverage.

There are major risks obviously, by going in 9:1 but also there are tracking and compounding differences in leveraged products so you won’t always get the “on paper” returns.

EDIT: Trom, yes correct. that's what I was getting at - you typed it out so much better than my long-winded reply

 

[Haroki]

Quote from winstontj:

rather than using a number of shares lets use round numbers in dollars.

Example is BGZ & BGU (3x Russell 1k Bear & Bull).

Short $5,000 of BGZ = effectively now long the Russell 1k, $5,000 in a 3x fund = $15k exposure. By shorting you generate $5,000 income, which is cash and marginable. Margin accounts usually give 2x buy power, so now you can turn your $5,000 short sale proceeds into $10k buy power.

Buy $10k into BGU (3x Bull Russell 1k) = $30k market exposure

Now you have $15k in market exposure by shorting BGZ and $30k market exposure buying BGU on margin with short sale proceeds, $15k + $30k = $45k which is 9x $5k.

Wow, I totally disagree with what you said here.

$5k of BGZ does not give you $15k exposure. If it went instantly to zero value, you'd lose 5k, not 15k. The only way to have actual leverage like that is with futures, where a 6k investment in the ES - 1 contract with IB - went to zero instantly, you'd lose ~ 48k, or 8x leverage.

My understanding of these ETF's - and i trade them almost exclusively right now - is just that they give 3x the move of the index. IOW, a 5% move on the Russel 1k = a 15% move on your ETF.

Plus, I think you're talking about making 2 separate trades, and then taking the profits and reinvesting it. Again, that's not 9x leverage, it's 2 separate trades.

And, it looks like you're comparing some at 1:1 margin, then reinvesting that at 2:1 margin, and calling that an apples/oranges comparison.

Unless I'm missing something.

 

[WinstonTJ]

Haroki,
I'm not 100% familiar with the way the 2x products on the market gain exposure but I am very familiar with the 3x products. With the 3x shares, every dollar invested by the shareholder is matched by two more dollars being borrowed and invested by the asset management company, on the shareholder’s behalf. $100 invested by you is matched with $200 borrowed and invested by Direxion giving you 300% exposure to the markets.

The beauty of these products is they do not offer you the same downside risk as other vehicles (i.e. losing more than your investment), but they give you the same upside of leveraged & compounded returns.

PM me if you’d like specifics - $5k invested in BGZ most certainly gives you $15k short exposure to the R1k just like $5k invested in BGU gives you $15k long exposure to the R1k. If you didn’t have the exposure to the markets how would the fund be able to produce the returns to the shareholder?

As for the crazy leverage trade – yes it’s a few trades and assumes that you get 1:1 margin or 2x buying power of your cash. Yes its two separate trades so you have two sets of fees and commissions as well as financing costs for margin, however the end result, before fees and expenses is 9x market exposure than your invested capital.

Quote from Haroki:

Wow, I totally disagree with what you said here.

$5k of BGZ does not give you $15k exposure. If it went instantly to zero value, you'd lose 5k, not 15k. The only way to have actual leverage like that is with futures, where a 6k investment in the ES - 1 contract with IB - went to zero instantly, you'd lose ~ 48k, or 8x leverage.

My understanding of these ETF's - and i trade them almost exclusively right now - is just that they give 3x the move of the index. IOW, a 5% move on the Russel 1k = a 15% move on your ETF.

Plus, I think you're talking about making 2 separate trades, and then taking the profits and reinvesting it. Again, that's not 9x leverage, it's 2 separate trades.

And, it looks like you're comparing some at 1:1 margin, then reinvesting that at 2:1 margin, and calling that an apples/oranges comparison.

Unless I'm missing something.

 

[Haroki]

Quote from winstontj:

Haroki,
I'm not 100% familiar with the way the 2x products on the market gain exposure but I am very familiar with the 3x products. With the 3x shares, every dollar invested by the shareholder is matched by two more dollars being borrowed and invested by the asset management company, on the shareholder’s behalf. $100 invested by you is matched with $200 borrowed and invested by Direxion giving you 300% exposure to the markets.

No need for pm's. Hopefully, ET can live up to its intent and be a place where people can learn. If I'm wrong and I get schooled, then everyone will learn something, other than I'm an idiot.

But where I'm coming from is that when I compare the Russel 1000 vs BGU, the index was down 2.12% vs 6.58% for BGU, or roughly 3x.

I read that you have some involvement with this, and so maybe what you describe above to be true - that is, this is what the fund does to get the 3x leverage, and the costs are passed on - the effect that WE see doesn't reflect that.

What I'm saying is that no matter how you slice it, as you agree to, our downside is limited to 5k, using your example. But if BGU goes up 100%, our upside isn't 300%. It's still just 100% when compared TO WHAT WE HAVE INVESTED. We only see 300% when we compare it to the underlying index, which doesn't matter, since our bet isn't in that.

What happens at the fund to give us this retrun really isn't of any concern to us. Basically, the way I see these instruments is that we get increased volatility, compared to what the index moves.

IOW, if we put 5k on a 1x R-1000 index, and it goes up 10%, we make 500. If we put 5k in BGU, we make 30%, or 1500.

I think you may be confusing the inner workings of how THE FUNDS make this all happen with what WE see happen?

 

[WinstonTJ]

Haroki - you are hardly an idiot - you seem to have a very good working knowledge of these products. They are highly sophisticated and very difficult to get your arms around them. Hopefully this will shed some light:

Long funds are WAY easier to explain because they are very straightforward. Take BGU for example – Large Cap Bull 3x – tracks the Russell 1000 index. We optimized the basket down from 1,000 names to 385 names. Daily holdings can be found on the website and are publicly available by 8pm nightly.

It took Proshares many many years to get 2x ETFs passed. When we filed for 3x ETFs the SEC approved but with stipulations. Our bull funds keep 80% invested in the basket of stocks and we must use the remaining 20% to gain the 220% leverage remaining.

300% target market exposure. On $1 million invested we will buy $800k into the underlying basket of stocks – Russell 1,000 “optimized” down to 385 names that track the R1k as close as we can . So we buy $800k into the basket of stocks for 80%, the remaining $200k is used to purchased mainly swaps on the R1k index as well as futures, options and some other derivatives (all of this is in the prospectus). So, we do actually take your $1 million dollars and go out and “buy” $3 million worth of market exposure.

The short funds are slightly different because they are all cash – you purchase $1M into BGZ and we short $3M on the R1k for you. We sometimes can buy the short side of futures or usually finance the entire position with swaps.

The thing is if we only used the shareholder capital then we would have no way to produce the extra returns (positive or negative) without the extra market exposure.

Sometimes I have trouble properly articulating these things – am I explaining well enough?

Quote from Haroki:

No need for pm's. Hopefully, ET can live up to its intent and be a place where people can learn. If I'm wrong and I get schooled, then everyone will learn something, other than I'm an idiot.

But where I'm coming from is that when I compare the Russel 1000 vs BGU, the index was down 2.12% vs 6.58% for BGU, or roughly 3x.

I read that you have some involvement with this, and so maybe what you describe above to be true - that is, this is what the fund does to get the 3x leverage, and the costs are passed on - the effect that WE see doesn't reflect that.

What I'm saying is that no matter how you slice it, as you agree to, our downside is limited to 5k, using your example. But if BGU goes up 100%, our upside isn't 300%. It's still just 100% when compared TO WHAT WE HAVE INVESTED. We only see 300% when we compare it to the underlying index, which doesn't matter, since our bet isn't in that.

What happens at the fund to give us this retrun really isn't of any concern to us. Basically, the way I see these instruments is that we get increased volatility, compared to what the index moves.

IOW, if we put 5k on a 1x R-1000 index, and it goes up 10%, we make 500. If we put 5k in BGU, we make 30%, or 1500.

I think you may be confusing the inner workings of how THE FUNDS make this all happen with what WE see happen?

 

[limitdown]

Quote from winstontj:

user,
they can be shorted just like anything else. I've seen a lot of hedge funds get cheap leverage by shorting a 3x short and using the proceeds + margin to buy into a 3x long - yielding 9x leverage.

It depends on your ToS inventory - do they have the shares to borrow so you can short?

Also - why wouldn't you want to just be long the short ETF rather than short the short ot vice versa?

unless they get 100% margin, then this only produces at most, 7.5 leverage, not 9x leverage

what are the symbols of these 3x funds?

or is this a real response or a wishful response?