Long term bear ETFs (decay)

[never2old]

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.

Thanks for your feedback & question(s)

Rightly so non-conventional type trades that include options requires more knowledge as well as more effort.

On NUGT, I don't follow that particular ETF, so some research on my part.

NUGT does not appear to be a gold ETF or track the gold index unlike GLD. According to the fund profile it's a leveraged ETF 'gold miners index'.

https://www.direxion.com/products/direxion-daily-gold-miners-bull-3x-etf#

I guess gold miners & their business have issues of cost of mining, production, refining & net product cost selling into the market.

Based on past performance NUGT is a forever decaying investment. From the fund website on April 22 it is going to reverse split 1:5

http://www.direxion.com/press-release/direxion-announces-reverse-splits-of-twelve-etfs

On March 31 the fund changed from a 3x to a 2x, see 'special notices' on the fund link.

Past 10 year performance with a $10k investment, at close yesterday the investment has dropped to $7.40.

https://www.splithistory.com/nugt/

I have no suggestions on how to trade NUGT, maybe others can jump in with their own strategies or experience.

With the upcoming reverse split, are you buying, if so, are you day trading or have a hold period?

Take a look at DUST inverse ETF gold miners bear

https://www.splithistory.com/?symbol=dust.

Both are decaying ETF's. Unless one could find a successful way to play the pops & drops, long term poor investment.

 

[RubberBand]

NUGT does not appear to be a gold ETF

Yes, that is true, but in general, it seems to move quite well with regards to the price of gold.

I wasn't looking for advice on how to trade it, but simply a discussion about this decay factor. If lets say you're bullish on gold and thinks it can hit 2000, then obviously NUGT will go up. But what if it takes 2 weeks vs. 2 months vs. 6 months? Looking at a chart, it seems to move nicely, but I don't understand the decay factor.

If I was to use options instead to play gold, and of course not even knowing what options I would buy, but the idea is that I would have to have a timeline in mind, correct? If I buy an option that expires in 2 weeks, then it might be worthless if it takes gold 2 months to get there. Likewise. If my option is 2 months away, but gold his 2000 in 2 weeks, then that long dated option might also not go up because there is time for gold to drop again before the expiry date.

But by buying NUGT, or some other gold ETF, I don't need to worry so much about time because I will just own it for either 2 weeks or two months and get paid if gold does reach 2000.

So in essence, what I'm asking is does the decay of this ETF, whatever that decay is, outweigh the fact that I might lose playing with options by not getting the timing right on which option I buy with regards to strike and expiry?

 

[never2old]

But by buying NUGT, or some other gold ETF, I don't need to worry so much about time because I will just own it for either 2 weeks or two months and get paid if gold does reach 2000.

So in essence, what I'm asking is does the decay of this ETF, whatever that decay is, outweigh the fact that I might lose playing with options by not getting the timing right on which option I buy with regards to strike and expiry?

any stock/ETF that is a perpetual decaying, why would anyone buy it?

it could pop for a moment, 1 day, 1 wk, 1 mth. If I was buying a decaying stock on the belief it might pop - then I would after buying it immediately set my target sell price, put in a sell order GTC & be done.

the issue is 'will it decay, if so, how fast' am I buying a dog.

options on the same stock understanding its a decaying stock, I might buy puts or sell ITM calls to doing a call or put spread.

to answer your direct question above ...

buy stock on the premise it will increase - yes, its what many investors do, on a decaying stock, why would I chance it?

on NUGT what would be your hold period or % exit & out gain?

buy or sell options or combinations to minimize the potential loss for max gain, for an event with a win/lose outcome over one day, one week, one mth, several mths.

on a decaying stock/ETF, whats possible, which of the two will get the best return or minimum loss? A smart option trader vs an investor buying a decaying ... I will go with the option trader

 

[LisaTrader]

At least with an ETF you just have to get the direction right.

Exactly! Someday I'll have to learn how to trade Options... but for now I do like the simplicity of ETFs. Pick your direction, pick your leverage and that is all you need. No strike price and no time frame. That being said, my hat is off to successful Options traders who no doubt make more profitable trades than me.

Note that just going from Gold (GLD) to Gold Miners (GDX) you typically get a fair bit of leverage. For example on Friday, April 17, GLD closed down 1.9% and GDX closed down 3.2%. Then of course to leverage GDX you can go with NUGT (2x long) and DUST (2x short).

@nerve2old... thanks I didn't realize the leverage for NUGT/DUST has been cut from 3x to 2x.

 

[never2old]

@LisaTrader, my posts above options vs buy&hold/trade decaying stocks/ETF's.

everyone has a strategy & since there are so many, at times it can boggle the min d.

I'd like to follow your post with this ...for a simple trade

GDX or GDXJ as a buy&hold with a mth to mth covered call.

GDX last at $29.94, (12mth range $16-$32) buying minimum 100 shares (300 would be a nice round number to buy) then immediately selling the ATM $30 strike price covered call expiry in 30 days May 22 will pay (last) $2.18, that's 7.2% for one mth trade.

https://www.barchart.com/etfs-funds/quotes/GDX/options?expiration=2020-05-22

Even if the option was exercised and you got the stock taken from you, one could always go back in 'rinse & repeat'. Should the stock be below $30 you still have the stock now with an ACB of approx $28 to do whatever, maybe the next mth covered call for another $2.18.

So many simple variables/strategies available, even a Jan 2021 $40 strike will pay $2.21(last) that again is approx 7% return just on the $29.94 you paid for the stock on 17 April, plus an added upside should the stock be at $40+ on May 22.

https://www.barchart.com/etfs-funds/quotes/GDX/options?expiration=2021-01-15&moneyness=allRows

maybe also take a look at GDXJ (12 mth range $19 -$42) with add-on covered call options

As for NUGT/DUST past performance both over time are decaying stocks/ETF's

 

[LisaTrader]

@nerve2old, thanks for the trading suggestion. I think I may give it a try to get my feet wet in Options trading.

Now, to follow your post, I would like to present this...

Where 2x and 3x leveraged ETFs work well is when the hold period is for a very short duration (ideally 1 or 2 days). An example of such a trade is a seasonal Gold system that use to work quite well, but performance in recent years has been poor. The trade is to short Gold for 1 day, shorting Gold Miners works even better. So the trade is to short GDX and to leverage it up
you go long DUST (2x Leverage Inverse GDX).

Here is the System:
- Buy DUST at the Open on the Monday of Option Expiration Week, Sell at Close.

This worked well before 2014, but sadly since 2014 performance has been poor.

Nonetheless, an example of a trade where you can take full advantage of a leveraged ETF and you don't have to worry about the leveraged ETF decay problem!

 

[never2old]

@LisaTrader, the naysayers will tell us 3X & 2X are short term traders. One has to check performance, decay & reverse splits.

your trade might just work, try it, see the outcome, learn from the experience. Good luck & do post back the outcome on expiry.

when I retired from the daily grind at age 63 in 2010 I bought 1000 shares TQQQ as a buy & hold based on the performance of the Nasdaq - didn't know what the heck would happen. I add options later right up till recently, it was a good move. Even with the drop, I could sell half the position & ride the rest doing long covered calls.

TQQQ like other index 3x's UPRO & UDOW have proven the long term works due to the forever splits - even taking into account recent events, those in 2012, 2016, December 2018.

https://www.splithistory.com/tqqq/

 

[never2old]

I'm speechless watching soxs (3x semi bear fund). Was $187 in dec 2018 when mkt tanked. Hit a low of $16 5 weeks ago. Went to $36 in last few days. But todays drop was just mind boggling. Hit $19 which is only $3 higher than its lows when the sox was 30% higher . Mind numbing .

SOXS get ready for another reverse split coming soon as the stock is around $5

its dropped $20 in the last 30 days, dropped $3 in the last 5 days.

https://www.direxion.com/products/direxion-daily-semiconductor-bull-3x-etf#

play the decay, short the stock or sell an option or two, play the decay

https://www.barchart.com/etfs-funds/quotes/SOXS/options