Shorting S&P 500 With Inverse ETF's

louisjxn · Jan 29, 2016

If the S&P 500 continues to rally up to around 2000, then I am considering using inverse ETF's like ProShares SH and SDS (leveraged) to short. I have always heard that over a certain period of time the value of these become unstable due to the fact that they have to be rebalanced every day. I'm just wondering how long one could hold these ETF's before worrying about the stability of the value. My time horizon would probably be a few weeks to a few months...depending on the market and whether or not I had to stop out.

Any thoughts on using these?

deltastrike · Jan 29, 2016

They're pretty good for a long only portfolio, you just have to get the timing down (easier said than done). Also consider SPXS and TVIX.

zdreg · Jan 29, 2016

louisjxn said:
If the S&P 500 continues to rally up to around 2000, then I am considering using inverse ETF's like ProShares SH and SDS (leveraged) to short. I have always heard that over a certain period of time the value of these become unstable due to the fact that they have to be rebalanced every day. I'm just wondering how long one could hold these ETF's before worrying about the stability of the value. My time horizon would probably be a few weeks to a few months...depending on the market and whether or not I had to stop out.

Any thoughts on using these?

about 10 minutes.

Alpha Trader · Jan 30, 2016

This is the same subject I was discussing with a friend for crude ETFs. In his opinion, the disparity appears most times after one good move takes place on a daily chart. However, it is not always like that; sometimes the skewed effect comes earlier or later.

Im hoping that someone knowledgable enough, can share their insight into this, as this "phenomenon" boggles me

ETcallhome · Jan 30, 2016

not sure why anybody that wanted to get short wouldn't just sell SPY. Commish and spread are neglible. It trades like water. You can get as small or as large as you want and hold as long as you want (if you can pay the dividends.)

Adam H · Jan 30, 2016

You can use spy puts or vix instruments like uvxy or tvix.
Just be aware of decay on those.

S&P is headed to the target shown below

http://wizeeconomy.com/2016/01/21/sp-500-elliot-wave-chart-january-21-2016/

Bradley J Price · Jan 31, 2016

Leveraged ETFs are good over a few weeks or even months, but you will be decay in choppy markets. If the market is linear, the price can be be exponential.
Here's a blog post that explains it a little better:
http://www.etfjunkie.com/blog/leveraged-etfs-can-be-terrible-long-term

Alpha Trader · Jan 31, 2016

@Bradley J Price it almost sounds like these ETFs function as a hybrid of straight equities and their options. Would you agree?

Adam H · Jan 31, 2016

Bradley, levered ETFs decay very quickly especially 3x ones so I would not hold those over a week or two time span.

Scataphagos · Feb 2, 2016

louisjxn said:
If the S&P 500 continues to rally up to around 2000, then I am considering using inverse ETF's like ProShares SH and SDS (leveraged) to short. I have always heard that over a certain period of time the value of these become unstable due to the fact that they have to be rebalanced every day. I'm just wondering how long one could hold these ETF's before worrying about the stability of the value. My time horizon would probably be a few weeks to a few months...depending on the market and whether or not I had to stop out.

Any thoughts on using these?

You can hold leveraged ETFs "through the swing"... weeks, months or even years... if you can handle the day-to-day volatility. Due to the time decay cost of leverage, the longer you hold the further the performance degrades vs. the non-leveraged. What starts out as 3x leverage may end up 2.6x or 2x over enough time. Even with the decay, the leveraged play is still worth it as it outperforms the non-leveraged over the swing duration.

I just eyeballed the QQQ vs. TQQQ (3x). Over the last 2 years, the QQQ was up about 30%. The TQQQ was up about 75%. Without time decay, one might have expected the TQQQ to have been up "3 times 30%", or up 90%. Time decay of leverage costs resulted in it being up "only" 75%.

The time decay isn't as rapid as some think.