Quote from Jerkstore:
Backtesting for an idea like this is problematic at best. This is an interesting idea, but I am not sold.
We are discussing a low reward, high risk, high % bet. The expected return of the leveraged etf stays the same as the volatility of the underlying goes higher, while the median return goes lower. This implies a different distribution of returns, not a lower expected return. That means if the stars align properly, your double and ultra ETF can really take off higher (particularly the double and triple shorts). These double and triple short ETF's can easily go hard to borrow at the same time, just like SKF did back in March 2009. First I would trade this strategy using strict stop losses. I would also suggest buying an upside call to help hedge the trend risk. However, the teeny calls in the leveraged etf's are juiced up due to this very phenomenon. This would naturally somewhat eliminate the "decay" returns you are after.
Quote from Robert Weinstein:
I have not looked at this idea in over two years when I was running numbers on some of the trades that could be done with the contango with the oil ETFs.
I would guess the quants have this figured out to the hundredth or less of a penny but couldn't options be used with this concept to further the time decay as well as protect from having your short called away? I would guess there is some sweet spot with a month and in the money option pair that may get you there.
Quote from Jerkstore:
I was thinking something similar. Like perhaps selling one ITM call, and buying three 10 delta calls, rather than sell the etf outright. I just took a look at the SKF may 17/22 call 1/3. You can sell the 17 calls for 1.28 and buy the 22 calls for .16.
Quote from Shhhhh:
So essentially you're doing a Bear Call Spread, with the purchase of 2 OTM calls as a hedge
I really like this play. Its a very cheap hedge with some nice sized potential rewards.
I did a simple test in Wealth-Lab, just shorting all 6 on 9/8/2006 and holding. Just commish at 0.01/share and $10K positions. Not sure how availability and margin/borrowing costs would affect results. Looks about the same as yours:Quote from akeserla:
Just changed the Dec 41 2008 dates to use the last price. So this analysis will hold for good.
http://spreadsheets.google.com/ccc?key=tmZ7nFxW2lKlOoJ8VVvWasw
Quote from Jerkstore:
I was thinking something similar. Like perhaps selling one ITM call, and buying three 10 delta calls, rather than sell the etf outright. I just took a look at the SKF may 17/22 call 1/3. You can sell the 17 calls for 1.28 and buy the 22 calls for .16. This will leave you with 80 cents of premium with 74 or so cents in intrinsic value in the spread. Therefore, to collect the 80 cents of premium, the etf needs to go down. If, the etf pins to the 22 strike you'd lose $4.2, and start to break even by 23.4.
As the market drops, and SKF goes up, the volatility would absolutely pop. Therefore, there should be a way to trade out of your position for far less of a loss than $4.2, due to being long volatility as SKF rises. Also, if the stars do align properly than this trade would absolutely kill it to the upside.
Quote from Robert Weinstein:
Your approach is well thought out. I was thinking a different angle though. I was thinking if one was to sell ITM calls on both the long and the short 3x ETF. Selling an ITM call is near a sytheic short and while not as good as a short in some respects (like limits on gains) it has some advantages over a pure shorting both the long and short 3X ETFs.
1. you wont get your short shares called away at the worst possible time
2. each day that goes by your gaining from not only the ETF decay but also the option decay
3. money can be made in a flat market
These are just ideas that I have not tested at all.
Quote from Ross Canfield:
Tough one. Logic and some of the data might have you short bot of them, BUT if there is a strong directional move one way or another that is sustained, you can lose big time...a 3X etf can go up 3 fold or more, if you short it, you're done (and your 98% gain on the short on the inverse won't make up for the loss).
Quote from Jerkstore:
This is exactly why I would suggest doing this via call spreads or even using 1 by 3's. The whole unlimited potential loss from one strategy doesn't work as a part of my overall business plan.