ultrashort etfs and free money

dumb_mother · Oct 21, 2008

ok, so i was thinking about it and i think i have a free money situation, so can someone tell me why i'm wrong please.

so assume you buy 1 barrel of oil at 100$
and you buy ultrashort oil for 50$

if oil goes to 50, ultrashort goes to 100
150=150=no loss (ignoring fees)

if oil goes to 200, ultrashort goes to 25?
150<200-25=175=25-fees in profit

does the neutralizing of the unlimited losses from natural shorting through whatever the ultrashort etfs use that makes it a finite loss also make it a free money situation?

dm

priceman · Oct 21, 2008

There is no such thing as free money in the markets.

thegazelle · Oct 21, 2008

Fund me an ultrashort oil. And don't say DUG, because thats incorrect.

l2tradr · Oct 21, 2008

Quote from thegazelle:

Fund me an ultrashort oil. And don't say DUG, because thats incorrect.

HOD on TSX. Nymex Crude Oil futures for the next delivery month.

bloosteak · Oct 21, 2008

no ultrashort is actually 2x. usually its more like 1.4x and you gotta think about whats underlying, which I believe is options and swaps.

and adjustments for net asset value

l2tradr · Oct 21, 2008

Intra-day 2X, you know what I meant.

Haroki · Oct 21, 2008

Quote from thegazelle:

Fund me an ultrashort oil. And don't say DUG, because thats incorrect.

DTO

dtrader98 · Oct 21, 2008

Quote from dumb_mother:

ok, so i was thinking about it and i think i have a free money situation, so can someone tell me why i'm wrong please.

so assume you buy 1 barrel of oil at 100$
and you buy ultrashort oil for 50$

if oil goes to 50, ultrashort goes to 100
150=150=no loss (ignoring fees)

if oil goes to 200, ultrashort goes to 25?
150<200-25=175=25-fees in profit

does the neutralizing of the unlimited losses from natural shorting through whatever the ultrashort etfs use that makes it a finite loss also make it a free money situation?

dm

The original assumptions are incorrect to begin with.

If oil goes to 50, ultrashort goes to 100
ie.. %change in ultrashort is -2*%change in oil.

here the change is -50% oil
and corresponding change in ultrashort
= 100% or -2*-50%

Ok, I buy that.

However, if oil goes to 200, that is a +100% incremental change. Meaning ultrashort instantly went to -2*100% = -200% = -50
not +25.

Any incremental change at or beyond 50%, means ultra short is zero or less.

You also have to take path dependencies into account, once you get that part down. Even in theory, there is no free lunch. Same problem exists in any type of hedge (even at 1X).

If your original conjectures were somehow correct, don't you think there would be 99.9999% of traders making risk free fortunes by now?

dumb_mother · Oct 22, 2008

Quote from dtrader98:
If your original conjectures were somehow correct, don't you think there would be 99.9999% of traders making risk free fortunes by now?

that's why i asked- i knew there was a hole somewhere it was to easy to be true. i didn't realise the ultrashorts could actually go to zero, i thought as it continued it would simply continue to follow the other product 2x% wise.

dm