Long term bear ETFs (decay)
- Thread starter Cuddles
- Start date
This graph is a good starting point.
1. Inverse ETPs like PSQ, as well as leveraged ultra-short ETFs like QID were top performing stocks of 2008, meaning they went up considerably indeed:
https://www.elitetrader.com/et/threads/top-stocks-of-2008.341727/
2. Leveraged ETFs decay due to losses compounding faster than gains.
For example if an index drops by 10% from $100 to $90 and then recovers 11% back to $100 then the corresponding 3x ETF would drop by 30% ($100 -> $70) and then go up by 33% to $93.10, therefore not ending back at the same price where it started. Basically leveraged ETFs will lose value because they are "truly % point to % point inverse to the index they track".
A few consecutive days down (or one big one) and the ETF can disappear with no hope for recovery, just like GUSH did just last week.
But the compounding of gains can be very strong on consecutive days up (for the leveraged ETFs).
(SQQQ is leveraged while PSQ is not, so they may behave differently)
https://www.elitetrader.com/et/threads/top-stocks-of-2008.341727/
2. Leveraged ETFs decay due to losses compounding faster than gains.
For example if an index drops by 10% from $100 to $90 and then recovers 11% back to $100 then the corresponding 3x ETF would drop by 30% ($100 -> $70) and then go up by 33% to $93.10, therefore not ending back at the same price where it started. Basically leveraged ETFs will lose value because they are "truly % point to % point inverse to the index they track".
A few consecutive days down (or one big one) and the ETF can disappear with no hope for recovery, just like GUSH did just last week.
But the compounding of gains can be very strong on consecutive days up (for the leveraged ETFs).
(SQQQ is leveraged while PSQ is not, so they may behave differently)
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Great topic..... they're not designed for long term holds; I day and swing trade them. But I just made 2k in profits holding TVIX UVXY selling them last week after holding several months.
I used to trade SDS QID FAZ but now I trade SQQQ SOXS SPXS TVIX/VXX/UVXY.
Remember the sec may restrict us from trading them any more, please everyone post your comment to the sec by the March 24 deadline, see www.fundcomments.com
I used to trade SDS QID FAZ but now I trade SQQQ SOXS SPXS TVIX/VXX/UVXY.
Remember the sec may restrict us from trading them any more, please everyone post your comment to the sec by the March 24 deadline, see www.fundcomments.com
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Good profits you made on SQQQ.
Frankly tech tends to be so strong, so long- that maybe a tougher trade for a new trader.
One younger trader, thought he would buy an inverse ETF because it looked so cheap, but I warned him they usually don't make money unless its a bear market...…………………………………………………………...…………………………………...……………...…....
Leveraged funds return the specified percentage (200%, 300%, -100%) of the DAILY return of the index they track. That means that if as @guru explained the index is choppy going up and down the daily return will not be the same as the long-term return if you had held 200% or 300% or been short 100% of the index. It rebalances every day. In some cases it will outperform the long-term return, in other cases it will underperform, it all depends on the path the underlying takes over that period. Best way to understand is to model it in Excel with some random and somewhat improbably price changes of the underlying, like up 10%, down 15%, up 7%...... It will instantly become clear to you what's going on. Absent the modeling it will take pages of explanation and you'll still get someone here I guarantee faffing on about "decay" which by and large doesn't exists, i.e. a 200% fund does indeed return 200% of the DAILY return of its underlying pretty closely.
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They tend to be reasonably/logicaly close, to the index. As Sig noted it varies. In 2019 TQQQ tended to u outperform better than 3 times QQQ. And today, PSQ did about -7.50% + QQQ about--8%-not exact numbers. PSQ is much more forgiving than a 3X ETF.
What goofs a 3x ETF , is a year when say, QQQ gains or loses 1 or 2%. And there have been ,many years/52 weeks ,when QQQ did not do 27%-- that may happen in a day or week in this market with 3x ETFs.
Here 4 m, almost, but did not buy some SH. last Friday, because I did not want to be holding 3X ETF, even a good downtrend can get extended/super extended.
NEVER trade /invest money you cant afford to lose;
Looks like some were buying PSQ + SQQQ,SDOW,...….maybe today...………………………………………………….. Hope this helps--it helped me.
those 3x are not suppose to be long term hold/trades, but lets look at a 'what-if'
on UVXY understanding its forever decaying behavior, I did a 'what-if' with an IV of 125%+. I looked at & mapped the past reverse splits to see over time after each consolidation what that the split new price was - I found it was somewhere between $36-$39.
then took the points 'what-if' I was to sell the long 'out 12 mths' ATM call & put. Knowing the behavior similar to the ^VIX, I figured time with time on my side, a trade is possible.
using a basic option calculator the option premium worked out to approx $15 on each side.
http://www.option-price.com/
with a $36 stock price I could basically follow this down to $6 knowing that should the stock get to the $7-$8 range it would reverse split again.
on the upside (taking into account March/April 2020 market & how UVXY moved around) the stock popped, my call option was in the money ... but no sweat, because I would 'sit & wait' still have 6 or so mths for UVXY to drop back.
stock at $36 with $30 of option premium my upside protection is stock at $66 before I start to lose on this trade if the stock was above $66 on expiry.
ideally on expiry stock at ~$10, I have $30 of option premium.
$36 call strike, stock on expiry at $10, that's $26 out of my $30 premium, I won $4 on the trade.
The other trade with the stock at $36 was to sell a 12 mth out covered call at $18 strike, receive $25 option premium, downside to ~$11.
should the stock drop before expiry I would use time decay to close the position.
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I'm an options amateur, so I'm not quite sure if you answered the question or not. How does buying the 3x ETF compare with the options play when you get to the bottom line?
The trick with options is that you have to figure out a date as well as a strike, correct? At least with an ETF you just have to get the direction right. And although you might be losing more with time, at least you don't have to guess at a specific date for when you price will hit, correct? So if I buy something like NUGT, wanting to play a price spike in gold, I can just buy it and wait a week or two. It seems to me like this is easier than having to get the other variables right if I was to play it with options. Please show me how this is wrong. Thanks.