short short etf + short long etf
- Thread starter Sundog
- Start date
well that's where you might be wrong. The money isn't always made on the direction, sometimes it's made on the spread. At any given time the spread is correct, but if you can improve that spread, then you have something to work with. Improving the spread is very dangerous, and involves averaging down. Most people dismiss that topic out of hand, so there is no point talking to them. It really isn't that dangerous, it's just a matter of constantly working that spread. Sometimes you win, sometimes you lose. But the goal is to always get that spread better than the correct spread the market is offering.
http://seekingalpha.com/article/262055-shorting-leveraged-etfs-to-profit-in-any-market
Well known, pretty much the short is going to be HTB and if you can get a locate you are going to pay as much in borrowing fees as you can expect the trade to yield.
It is a sound line-of-thought though and worth investigating as an example of how a structural edge takes shape. And I have spent very little time on this, there may well be low hanging fruit left esp in less liquid and international issues.
Well known, pretty much the short is going to be HTB and if you can get a locate you are going to pay as much in borrowing fees as you can expect the trade to yield.
It is a sound line-of-thought though and worth investigating as an example of how a structural edge takes shape. And I have spent very little time on this, there may well be low hanging fruit left esp in less liquid and international issues.
I was asked to comment via PM on the general idea for these types of trades.
I agree that while there is no such thing as a 'risk free rate of return' - including sovereign interest rates.
I understand the intent of the construction. There is some risk in the trade, and there is certainly alot of carry considerations.
My advice would be to put a very modest amount of 'skin in the game' and try it out with small size in a live market. See if the the way your statement is marking is consistent with your modeling assumptions.
If your proposed strategy is ties up very large amounts of capital for extended periods of time in order to capture a very modest carry cost differential, I would say to take a pass.
I personally see more delta risk in some of these ideas than has been discussed quite frankly.
I agree that while there is no such thing as a 'risk free rate of return' - including sovereign interest rates.
I understand the intent of the construction. There is some risk in the trade, and there is certainly alot of carry considerations.
My advice would be to put a very modest amount of 'skin in the game' and try it out with small size in a live market. See if the the way your statement is marking is consistent with your modeling assumptions.
If your proposed strategy is ties up very large amounts of capital for extended periods of time in order to capture a very modest carry cost differential, I would say to take a pass.
I personally see more delta risk in some of these ideas than has been discussed quite frankly.
The trade I am referring to is not about trying to capture a roll cost or mgmt fee decay, it is about leveraged ETFs and a mathematical problem with the way they are priced. Many leveraged ETFs, by design and laid out in their prospectus, are supposed to return some multiple (or inverse multiple as the case may be) of the PERCENTAGE return of whatever underlying they are trying to replicate.
Follow the math through:
A simple and extreme example, 2 ETFs, 1 unleveraged and the other 2x levered to provide 2 times the daily percentage return.
Day 1, Index= 100, 1x=100, 2x=100 (you can price the 2x at 200 to start, makes no difference in end result)
Day 2, Index down 15%, Index= 85, 1x=85, 2x=70 (Index and 1x always the same)
Day 3, Index up 20%, Index= (85 * 1.2)=102 2x=(70*1.4)=98
See the problem? And even with realistic inputs, directionless volatility erodes the leveraged ETF price in a very meaningful way, no roll or fees involved.
And yes as you and the article stated there are many risks to the trade, a one-way freight train market, your short getting called at the worst time, etc. I am not advocating it, just saying it's a legit structural pricing problem and some of the people that caught on early made some decent coin.
Actually that´s what I´d like to do, if i find sth. worthwhile.
Still checkin ETN´s , ETC`s on the German Boerse, those which I am able to borrow via IB.
I was always hesitant having to much short exposure. As I stated at the beginning, my mate did the setup once and this trade goes down down down... I mean in a short short setup, up up up, adding with linear regression below the line.
Sounds too easy to me.
The risk seems to be if the market dives once, the profit is gone quickly, otherwise it is a good time to go slowly into the trade.
Anyway, I still put it on the sideline, still figuring out other stuff.
The whole idea COULD make dough, if you take the price risk, as always!