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My personal experience shows 3x etf is not a fair game
- Thread starter GloriaBrown
- Start date
You need to view these leveraged ETF as a proxy to a basket of futures contracts.
Decay comes from rebalancing which forces leveraged ETF to buy high and sell low at the end of the day in order to maintain proper exposure for the next day. They go longer as price rises and shorter as price falls.
For example, a 2x ETF holds 2000 contracts to provide a 2x exposure on 1000$ on a 10$ underlying. At the end of the day, the underlying is up 10% to 11$, and the 2000 contracts are up 10% in value, so the NAV is 1200 which is 20% gain for the day. For the next day, if the ETF remains at 2000 contracts and the underlying is up 10% again 1.20$ to 12.10$, it would be a 220$ gain or only 18.3%. The ETF needs to buy 181 contracts to return 240$. If market retrace to the exact same starting price, the ETF loses on 2181 contracts which is a 218.10$ loss. Underlying is at the same place, ETF is down 18.10$ total, NAV at 981.90. The ETF then sells 217 contracts to have proper exposure (1963.8 contracts).
What Sig is saying is if you rebalance your ETF position to maintain the same contract size, then you have long term 2x exposure. In this case, at the end of the day, you have to sell enough stock to go from 2181 to 2000 contracts. If you had 100 shares, then your must sell 8.3 shares at the end of the first day.
Porfolio :
Start of day 1 : 100 shares * 10$ = 1000$
End of day 1 : Sell 8.3 shares @12$ -> 91.7 ETF, 99.60$ -> 1099.60$ total value
End of day 2 : ETF down to 9.82$ * 91.7 = 900.49$ + 99.60$ cash = 1000.09$
At this point you would buy 10.1 shares to maintain a 2000 contract position.
So the point is if you want long term leveraged exposure to the underlying, you need to maintain the same number of contracts/options using the ETF as a proxy. Doing so, you eliminate long term decay in the same way that if you held the contracts yourself. To achieve this, you will need to have cash on hand to buy more ETF shares when price drops since the ETF will be selling contracts and your contract/share ratio is out of line. The amount of money need to be half for 2x and 2/3 for 3x unless you accept a gradual exposure decrease which is what is referred as decay. Keeping that cash on hand means your exposure is 1x less rebalancing fees.
Decay comes from rebalancing which forces leveraged ETF to buy high and sell low at the end of the day in order to maintain proper exposure for the next day. They go longer as price rises and shorter as price falls.
For example, a 2x ETF holds 2000 contracts to provide a 2x exposure on 1000$ on a 10$ underlying. At the end of the day, the underlying is up 10% to 11$, and the 2000 contracts are up 10% in value, so the NAV is 1200 which is 20% gain for the day. For the next day, if the ETF remains at 2000 contracts and the underlying is up 10% again 1.20$ to 12.10$, it would be a 220$ gain or only 18.3%. The ETF needs to buy 181 contracts to return 240$. If market retrace to the exact same starting price, the ETF loses on 2181 contracts which is a 218.10$ loss. Underlying is at the same place, ETF is down 18.10$ total, NAV at 981.90. The ETF then sells 217 contracts to have proper exposure (1963.8 contracts).
What Sig is saying is if you rebalance your ETF position to maintain the same contract size, then you have long term 2x exposure. In this case, at the end of the day, you have to sell enough stock to go from 2181 to 2000 contracts. If you had 100 shares, then your must sell 8.3 shares at the end of the first day.
Porfolio :
Start of day 1 : 100 shares * 10$ = 1000$
End of day 1 : Sell 8.3 shares @12$ -> 91.7 ETF, 99.60$ -> 1099.60$ total value
End of day 2 : ETF down to 9.82$ * 91.7 = 900.49$ + 99.60$ cash = 1000.09$
At this point you would buy 10.1 shares to maintain a 2000 contract position.
So the point is if you want long term leveraged exposure to the underlying, you need to maintain the same number of contracts/options using the ETF as a proxy. Doing so, you eliminate long term decay in the same way that if you held the contracts yourself. To achieve this, you will need to have cash on hand to buy more ETF shares when price drops since the ETF will be selling contracts and your contract/share ratio is out of line. The amount of money need to be half for 2x and 2/3 for 3x unless you accept a gradual exposure decrease which is what is referred as decay. Keeping that cash on hand means your exposure is 1x less rebalancing fees.
You need to view these leveraged ETF as a proxy to a basket of futures contracts.
Decay comes from rebalancing which forces leveraged ETF to buy high and sell low at the end of the day in order to maintain proper exposure for the next day. They go longer as price rises and shorter as price falls.
For example, a 2x ETF holds 2000 contracts to provide a 2x exposure on 1000$ on a 10$ underlying. At the end of the day, the underlying is up 10% to 11$, and the 2000 contracts are up 10% in value, so the NAV is 1200 which is 20% gain for the day. For the next day, if the ETF remains at 2000 contracts and the underlying is up 10% again 1.20$ to 12.10$, it would be a 220$ gain or only 18.3%. The ETF needs to buy 181 contracts to return 240$. If market retrace to the exact same starting price, the ETF loses on 2181 contracts which is a 218.10$ loss. Underlying is at the same place, ETF is down 18.10$ total, NAV at 981.90. The ETF then sells 217 contracts to have proper exposure (1963.8 contracts).
What Sig is saying is if you rebalance your ETF position to maintain the same contract size, then you have long term 2x exposure. In this case, at the end of the day, you have to sell enough stock to go from 2181 to 2000 contracts. If you had 100 shares, then your must sell 8.3 shares at the end of the first day.
Porfolio :
Start of day 1 : 100 shares * 10$ = 1000$
End of day 1 : Sell 8.3 shares @12$ -> 91.7 ETF, 99.60$ -> 1099.60$ total value
End of day 2 : ETF down to 9.82$ * 91.7 = 900.49$ + 99.60$ cash = 1000.09$
At this point you would buy 10.1 shares to maintain a 2000 contract position.
So the point is if you want long term leveraged exposure to the underlying, you need to maintain the same number of contracts/options using the ETF as a proxy. Doing so, you eliminate long term decay in the same way that if you held the contracts yourself. To achieve this, you will need to have cash on hand to buy more ETF shares when price drops since the ETF will be selling contracts and your contract/share ratio is out of line. The amount of money need to be half for 2x and 2/3 for 3x unless you accept a gradual exposure decrease which is what is referred as decay. Keeping that cash on hand means your exposure is 1x less rebalancing fees.
I have said many times that the case I am talking about is holding the 3X ETF from days to years.
politeness is not your forte.You can imagine the 3x etf as anything you like, especially about the decay and contango part, we just cannot stop you.
This article explains it very well:
http://www.futuresmag.com/2010/02/28/trading-leveraged-and-inverse-etfs?page=2
http://www.futuresmag.com/2010/02/28/trading-leveraged-and-inverse-etfs?page=2
These leveraged ETFs are synthetically pegged to the underlying with options, and options come with decay so you are bound to lose if you "buy and hold" them.
Its particularly horrendous for UWTI because CL is in deep contango, the 12 month contango was nearly $10 back in Jan, currently CLZ (dec contract) is only ~$7 higher than where it was back in Jan, factor in the massive decay in options and its not hard to see why UWTI has been crushed even though CLZ is currently well off Jan lows.
Only trade what you truly understand, you will only lose money if you continue to think that the market is wrong or its unfairly stacked against you.
Its particularly horrendous for UWTI because CL is in deep contango, the 12 month contango was nearly $10 back in Jan, currently CLZ (dec contract) is only ~$7 higher than where it was back in Jan, factor in the massive decay in options and its not hard to see why UWTI has been crushed even though CLZ is currently well off Jan lows.
Only trade what you truly understand, you will only lose money if you continue to think that the market is wrong or its unfairly stacked against you.
These leveraged ETFs are synthetically pegged to the underlying with options, and options come with decay so you are bound to lose if you "buy and hold" them.
Its particularly horrendous for UWTI because CL is in deep contango, the 12 month contango was nearly $10 back in Jan, currently CLZ (dec contract) is only ~$7 higher than where it was back in Jan, factor in the massive decay in options and its not hard to see why UWTI has been crushed even though CLZ is currently well off Jan lows.
Only trade what you truly understand, you will only lose money if you continue to think that the market is wrong or its unfairly stacked against you.
Has nothing to do with options.
Actually UWTI is only invested in futures (http://www.velocitysharesetns.com/uwti) not options. USO, the 1X fund that tracks the same underlying, is also invested entirely in oil futures (http://www.unitedstatescommodityfunds.com/fund-details.php?fund=uso). So both the 1X and 3X are exposed to the same contango. And of course if you're comparing UWTI which only holds the futures to the futures themselves, both will obviously be subject to the same contango.These leveraged ETFs are synthetically pegged to the underlying with options, and options come with decay so you are bound to lose if you "buy and hold" them.
Its particularly horrendous for UWTI because CL is in deep contango, the 12 month contango was nearly $10 back in Jan, currently CLZ (dec contract) is only ~$7 higher than where it was back in Jan, factor in the massive decay in options and its not hard to see why UWTI has been crushed even though CLZ is currently well off Jan lows.
Only trade what you truly understand, you will only lose money if you continue to think that the market is wrong or its unfairly stacked against you.
Has nothing to do with options.
I stand corrected, just read tibster's excellent post on how these leveraged ETFs work.