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My personal experience shows 3x etf is not a fair game
- Thread starter GloriaBrown
- Start date
No, there isn't. Again, I'll be happy to provide you a Quantopian backrest to show that if you rebalance the portfolio daily so the long 1x is returning the percent daily change the same as the 3x or inverse there is absolutely no "decay" beyond the fees for each ETF which a very small. Contango has nothing to do with anything, if a 1x is tracking an index of something subject to contango it's impacted by the contango the same as the 2x, 3x, or inverse! If you don't rebalance, then in some markets the 3x will return more than 3 times the underlying and sometimes it will return less, it's entirely path dependent. Something that sometimes returns more and sometimes returns less is not "decaying" any more than MSFT is "decaying".
Let me provide an example. You go short $100 in a 2X fund and long $200 in a regular ETF tracking the same index, so one should exactly balance the other and over time you'll make guaranteed money as the 2X short position "decays". On day 1, the index falls 20%. Your short position goes to $140 and your long position goes to $160, so you're still at $300. The next day the index goes up 20%. Your short position is now at $84 and your long position is at $192. Your total is $276, you lost $24 because the 2X ETF didn't "decay" like you thought it would. If you keep bouncing back and forth with a loss followed by a similar percentage gain, you lose more and more money on this "can't lose" supposed "decay" of the 2X ETF, which in fact is losing value at a slower rate than twice the 1X regular ETF. Any time you have a choppy market this will happen, you only see "decay" if you have a nearly monotonically increasing or decreasing market.
rebalancing you mean buying and selling 3x etf everyday? That is a lot of commission fee. I am talking about the holding 3x etf for days, weeks, months or years cases.
No, there isn't. Again, I'll be happy to provide you a Quantopian backrest to show that if you rebalance the portfolio daily so the long 1x is returning the percent daily change the same as the 3x or inverse there is absolutely no "decay" beyond the fees for each ETF which a very small. Contango has nothing to do with anything, if a 1x is tracking an index of something subject to contango it's impacted by the contango the same as the 2x, 3x, or inverse! If you don't rebalance, then in some markets the 3x will return more than 3 times the underlying and sometimes it will return less, it's entirely path dependent. Something that sometimes returns more and sometimes returns less is not "decaying" any more than MSFT is "decaying".
Let me provide an example. You go short $100 in a 2X fund and long $200 in a regular ETF tracking the same index, so one should exactly balance the other and over time you'll make guaranteed money as the 2X short position "decays". On day 1, the index falls 20%. Your short position goes to $140 and your long position goes to $160, so you're still at $300. The next day the index goes up 20%. Your short position is now at $84 and your long position is at $192. Your total is $276, you lost $24 because the 2X ETF didn't "decay" like you thought it would. If you keep bouncing back and forth with a loss followed by a similar percentage gain, you lose more and more money on this "can't lose" supposed "decay" of the 2X ETF, which in fact is losing value at a slower rate than twice the 1X regular ETF. Any time you have a choppy market this will happen, you only see "decay" if you have a nearly monotonically increasing or decreasing market.
rebalancing you mean buying and selling 3x etf everyday? That is a lot of commission fee. I am talking about the holding 3x etf for days, weeks, months or years cases.
Yes, if you are doing an apples to apples comparison you'd have to re-balance at the end of the day every day. And it would create a lot of commissions and as I stated you'd get no-where because there is no "decay" on the 3x ETF. And as I pointed out with my math example, if you just hold it for days, weeks, or months you have just as much chance of losing money as making it because in a chopy market the 3X will lose less than 3 times the regular ETF. If you did put on a position where you are short the 3X and long the equivalent regular ETF you'll only make money if the underlying goes almost monotonically up or down. So you're really placing a bet against volatility with that position.rebalancing you mean buying and selling 3x etf everyday? That is a lot of commission fee. I am talking about the holding 3x etf for days, weeks, months or years cases.
No, there isn't. Again, I'll be happy to provide you a Quantopian backrest to show that if you rebalance the portfolio daily so the long 1x is returning the percent daily change the same as the 3x or inverse there is absolutely no "decay" beyond the fees for each ETF which a very small. Contango has nothing to do with anything, if a 1x is tracking an index of something subject to contango it's impacted by the contango the same as the 2x, 3x, or inverse! If you don't rebalance, then in some markets the 3x will return more than 3 times the underlying and sometimes it will return less, it's entirely path dependent. Something that sometimes returns more and sometimes returns less is not "decaying" any more than MSFT is "decaying".
Let me provide an example. You go short $100 in a 2X fund and long $200 in a regular ETF tracking the same index, so one should exactly balance the other and over time you'll make guaranteed money as the 2X short position "decays". On day 1, the index falls 20%. Your short position goes to $140 and your long position goes to $160, so you're still at $300. The next day the index goes up 20%. Your short position is now at $84 and your long position is at $192. Your total is $276, you lost $24 because the 2X ETF didn't "decay" like you thought it would. If you keep bouncing back and forth with a loss followed by a similar percentage gain, you lose more and more money on this "can't lose" supposed "decay" of the 2X ETF, which in fact is losing value at a slower rate than twice the 1X regular ETF. Any time you have a choppy market this will happen, you only see "decay" if you have a nearly monotonically increasing or decreasing market.
Your example is not correct. After failing 20%, 1x stuff needs to raise 25% to get back to original price.
Patience Sig, patience. I was very specifically showing a scenario where a portfolio short the supposedly "decaying" leveraged fund and long the unleveled ETF in equal ratios lost value overall. I very specifically stated that this scenario is one in which the underlying goes up and down by a similar percent each day in a choppy manner. As you pointed out, going down and back up the same percentage doesn't return you to your starting point. Unfortunately that fact is quite irrelevant to this discussion, which was a demonstration of a scenario where you lose money with this strategy. If a strategy can lose money in some scenarios and make money in others you're not talking about "decay". It's important to understand that before engaging in such a strategy, and I was doing my best to help someone from getting burned because they didn't. This isn't a question open for debate, it's simply math.Your example is not correct. After failing 20%, 1x stuff needs to raise 25% to get back to original price.
Patience Sig, patience. I was very specifically showing a scenario where a portfolio short the supposedly "decaying" leveraged fund and long the unleveled ETF in equal ratios lost value overall. I very specifically stated that this scenario is one in which the underlying goes up and down by a similar percent each day in a choppy manner. As you pointed out, going down and back up the same percentage doesn't return you to your starting point. Unfortunately that fact is quite irrelevant to this discussion, which was a demonstration of a scenario where you lose money with this strategy. If a strategy can lose money in some scenarios and make money in others you're not talking about "decay". It's important to understand that before engaging in such a strategy, and I was doing my best to help someone from getting burned because they didn't. This isn't a question open for debate, it's simply math.
while the 1x etf drop 20% in a day then raise 25% next day many times it will still remain at the exact same price, the 3x bull or bear etf wouls drop to almost zero. This is what people call decay and this is very simple math. But the contango part is the bigger part why uwti drops a lot in these months. This is apple to apple no reblanace hold for days to years compare. Your example is a bad one because drop 20% then raise 20% is actually drop 4% overall.
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Sure thing, knock yourself out. I also highly recommend shorting VIX futures in that case. Those things "decay" like nobody's business.....most of the time.while the 1x etf drop 20% and raise 25% many times it will still remain at the exact same price, the 3x bull or bear etf wouls drop to almost zero. This is what people call decay and this is very simple math. But the contango part is the bigger part why uwti drops a lot in these months. This is apple to apple no reblanace compare.
Sure thing, knock yourself out. I also highly recommend shorting VIX futures in that case. Those things "decay" like nobody's business.....most of the time.
drop 20% then raise 20% is actually dropping 4% and it is not moving side way at all, may be this is too hard for you to understand.
Absolutely, my limited intellect bows before your superior math skills. As I said, go get em. Only wish I could be the counterparty to your trades!drop 20% then raise 20% is actually dropping 4% and it is not moving side way at all, may be this is too hard for you to understand.