The Dangers of x2 and x3 leveraged ETF's

[Soon2Bgreat]

Quote from the1:

This is true only in theory. A leveraged 2x Bear ETF does not consistently deliver a 2% return on a 1% decline of the underlying but your point is well taken.

Right, the point is it's not simply a leveraged delta position as you would normally have if you leveraged 2 or 3xs. It's also a position on volatility.

That's why people say to be careful, since you think you are only exposed to the risk of leverage, though in reality you are exposed to additional risk. That's neither good nor bad - as with everything it depends on context.

 

[Don Bright]

Quote from ScalperJoe:

When these doubles came out in 2007 they were so new that many traders got caught off guard in not knowing how the volatility premium and rebalancing feature can work against you.

What's great for the issuer is they can keep doing reverse splits, so for example the price on QID is actually much LOWER than where it started, given the reverse split.

Right, if something is designed mathematically to go to zero, such as these 2x and 3x ETF's, and the issuer must do reverse splits to keep them active, the risk is pretty obvious... however, what is obvious to some, may not be to everyone....thus the disclaimers from the issuers.

Don

 

[Moderate]

2x arent that bad

3x ur getting ripped off

 

[Mvector]

Quote from Don Bright:

Even the firms that provide leveraged ETF's advise to only day trade.


Trading of Ultra ETF's: The Ultra ETF's, by design, are basically for Day Trading only.
The UltraPro and UltraPro Short ProShares offered in this Prospectus (each, a “Fund” and together, the “Funds”) seek leveraged or inverse leveraged investment results for a single day only, not for longer periods.


etc.

Don

I agree - I trade 200% leveraged Russell 2000 and S&P500 ProShares ETF's with 1 to 3 day holds and it works very good.

 

[kivd]

Quote from newwurldmn:

Market time series: +10%, -10%
2x levered fund time series: +20%, -20%

net return after two days:

Market: -1%
Levered fund: -4%

Volatility is massively against you in a 2x levered fund. That's why they are dangerous.

Volatility is not against against you.

Market: +10%, +10%
2x Leveraged: +20%, +20%

net return

market: +21%
2x leveraged: +44%

44 > 21 x 2

So volatility can be with or against you

 

[Don Bright]

Just a math question for you smart guys... start with $100. Add 10%. then take away 10% from that sum. Repeat a few times... then do it with 2x and 3x.

Seriously, show me some answers.....


(not a trick or anything, just making sure you guys get my point. Up 10 and down 10 is not excess volatility, just sample movements).


Don

 

[kivd]

Quote from Don Bright:

Just a math question for you smart guys... start with $100. Add 10%. then take away 10% from that sum. Repeat a few times... then do it with 2x and 3x.

Seriously, show me some answers.....


(not a trick or anything, just making sure you guys get my point. Up 10 and down 10 is not excess volatility, just sample movements).


Don

Did you not just read my post?

 

[Moderate]

its better than buying on margin in most cases and your in a debit situation

 

[Don Bright]

Quote from kivd:

Did you not just read my post?

May have gotten tied up while reading before posting. But, yes, even flat volatility can cause a fall, so excess can certainly cause more downside.

Don

 

[kivd]

Quote from Don Bright:

May have gotten tied up while reading before posting. But, yes, even flat volatility can cause a fall, so excess can certainly cause more downside.

Don

No,

If the volatility continues in the same direction the return is greater.


Market: +10%, +10%
2x Leveraged: +20%, +20%

net return

market: +21%
2x leveraged: +44%

The market was up a total of 21 percent but the ETF was up 44 percent which MORE than double the market.

It is similar if the market continues down:

Market: -10%, -10%
2x Leveraged: -20%, -20%

Market total loss: -%19
2x Leverage Total loss: -36%
A loss of 36 percent is LESS than double of nineteen percent.