Proshares arb?

H

heech

Hi all,

Just curious if anyone has thought about ways of taking advantage of the huge explosion in various proshares 2x/3x style ETFs. (I know many are working arb-type strategies involving index ETFs, commodity ETF roll-over, etc.)

My understanding is that these leveraged ETFs aim for 2x (or some multiple) *daily* performance of whatever underlying.

So, presumably, they're buying whatever calls or puts to get to -2.0 delta or +2.0 delta. And I'm thinking that for best results... they have to get their delta right at +2.0 at the close of every day so they can match the following day's performance.

- balancing too early in the day means a big move in the underlying and they lose tracking,

- balancing the next morning means missing out on overnight moves.)

Doesn't it seem fair to say they're probably not rebalancing until the end of day? You can't do anything about that with a very liquid index (say ultrashort spx)... but perhaps there are other choices out there that doesn't have a lot of liquidity in the underlying's options? And after a big move in the underlying... you can get in there and buy the options the proshare guys will probably need to buy to get back to their target delta before the y do?

Just kicking ideas around on a lazy Saturday afternoon. Would love to hear others' thoughts, candidate ETFs/underlying worth looking into, etc...
 
Even if it was possible (i would need to think about it), they would buy very specific options OTC which may be very difficult for retail traders to go. Since they also have usually the bear and the bull etf, they may even trade "in-house" one etf with another.
 
Quote from heech:

Hi all,

Just curious if anyone has thought about ways of taking advantage of the huge explosion in various proshares 2x/3x style ETFs.
More...

They don't buy options.
They adjust by buying and selling stock.

Here's one way to take advantage of them: Be absolutely certain you never buy any of them - unless it's for a day trade.

Mark
 
I'm not familiar with these ETF's so I have no specifics to offer.

However, if you have a brain storm, it's generally a good idea to track and crunch the numbers. It's the only way to separate the hair-brained ideas from the potential gems.

:)
 
Quote from heech:

Hi all,

they have to get their delta right at +2.0 at the close of every day so they can match the following day's performance.

More...

This is not a new idea.

There are already plenty of players who, anticipating what the triples will have to buy or sell - buy or sell ahead, then feed it back to the funds near the end of the day. There's plenty of opportunity to get whipsawed when attempting this.

Adam Warner has written about this, but I have no specific page reference. http://adamsoptions.blogspot.com/

Mark
 
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