What do you think of this trade.

[JJacksET4]

Here's some more thoughts about these 3X ETFs - first of all I wanted to say that I think the Financial 3Xs have shown more decay then some of the other ones, which makes sense because options on Financials have clearly been very expensive (i.e. High IV on big bank stocks, etc).

However, I believe that most or all of these have some time decay and it's quite easy to see.

I just looked at ERX (3x Energy bull) and ERY (3X energy bear).
Here is some information:
Today's close
ERX - $33.94 - note that it's about $34.00
ERY - $20.94

So, I went back to see the last time ERX was about $34 and found the close on May 6 - exactly $34.00 - what was ERY?...close $22.46.

Then, to check over a greater time period I went farther back and found ERX closed at $34.12 on Jan 15. Looked up ERY for that day - $39.72.

So in just about 4 months, ERX has gained nothing and ERY has gone from $39.72 to $20.94. Looks like pretty clear decay to me. Something to consider anyways.

JJacksET4

 

[MTE]

Quote from JJacksET4:

Here's some more thoughts about these 3X ETFs - first of all I wanted to say that I think the Financial 3Xs have shown more decay then some of the other ones, which makes sense because options on Financials have clearly been very expensive (i.e. High IV on big bank stocks, etc).

However, I believe that most or all of these have some time decay and it's quite easy to see.

I just looked at ERX (3x Energy bull) and ERY (3X energy bear).
Here is some information:
Today's close
ERX - $33.94 - note that it's about $34.00
ERY - $20.94

So, I went back to see the last time ERX was about $34 and found the close on May 6 - exactly $34.00 - what was ERY?...close $22.46.

Then, to check over a greater time period I went farther back and found ERX closed at $34.12 on Jan 15. Looked up ERY for that day - $39.72.

So in just about 4 months, ERX has gained nothing and ERY has gone from $39.72 to $20.94. Looks like pretty clear decay to me. Something to consider anyways.

JJacksET4

It's not time decay. The price of ETF today depends on the path that the underlying index took in the past. Different paths result in different outcomes.

For example, let's start at a 100 both for the 3xbull ETF and the underlying index. The first day the index rises by 25% and is at 125. The ETF would rise by 75% and would be at 175. The next day the index drops by 20% and it is back at 100. The ETF, on the other hand, would drop by 60% and would be at 70.

So the index change over 2 days is 0%, the 3xbull ETF is down 30%.

The same scenario for the 3xbear ETF would be: down 75% on the first day to 25, and then up 60% the next day to 40. That means it's down 60% after 2 days.

 

[heech]

Quote from MTE:

It's not time decay. The price of ETF today depends on the path that the underlying index took in the past. Different paths result in different outcomes.

Thank you for the clear example. Exactly.

Key point: hedged every day, leads to non-linear final results.

 

[JJacksET4]

Well, if an index stays at the same value, but the 3X bear and bull both decline, you can call it whatever you want I guess. Even if it's a mathematically based decline, there is some time required for it to occur.

I wouldn't entirely discount the cost of doing business though meaning the price of buying the leverage that they do. Remember that even a basic mutual fund that has expenses has what could be called a time decay if you wanted to call it that - if the investments they select return exactly 0.0%, the fund will likely be down because of expenses. If a mutual funds investments return exactly 0.0% every year, holding the fund will lose money over the years.

Here is another thought - if XLF, FAS and FAZ were all 10.00 one day and then XLF closed exactly at 10.00 everyday for the next 60 trading days and people didn't know this would happen so there were still premiums, etc., what you do think FAS and FAZ would be at after those 60 trading days? I would be willing to bet they would not be 10.00 each, but if they changed 0.0 each day since XLF never changed, then they would be.

JJacksET4

 

[dagnyt]

Quote from JJacksET4:



Here is another thought - if XLF, FAS and FAZ were all 10.00 one day and then XLF closed exactly at 10.00 everyday for the next 60 trading days and people didn't know this would happen so there were still premiums, etc., what you do think FAS and FAZ would be at after those 60 trading days? I would be willing to bet they would not be 10.00 each, but if they changed 0.0 each day since XLF never changed, then they would be.

JJacksET4

Why wouldn't they be 10?

Zero trading expenses.
No rebalancing.

Every day the fund price would change by 3 x zero

Mark

 

[JJacksET4]

Quote from dagnyt:

Why wouldn't they be 10?

Zero trading expenses.
No rebalancing.

Every day the fund price would change by 3 x zero

Mark

They don't work for free. Even if they had 0 trading expenses per se, they have expenses.

The closest I could find in a quick review was market close Jan 30-Feb 2
XLF - 9.24 to 9.24 (one market day - no change)
FAS - 9.17 to 9.17 - no change
FAZ - 50.40 to 50.07 - drop of .33

Remember that these funds "aim" for a 3x return - doesn't mean they will always be 100%.

I stand by my guess that if there are ever many days in a row with absolutely no change in the index value at the close in any of the days, the 3Xs will change.

JJacksET4

 

[Ms Varima-Garch]

the discussion has gotten a little overmathemathicezied here, for my money . . .

what's the bottom line on this please? can you make money with options on these financial instrumentalities? anyone?

i'm make scare of this, because it is leverage plus add another leverage

 

[MTE]

Quote from Ms Varima-Garch:

the discussion has gotten a little overmathemathicezied here, for my money . . .

what's the bottom line on this please? can you make money with options on these financial instrumentalities? anyone?

i'm make scare of this, because it is leverage plus add another leverage

If this is too much math for you then maybe you are in the wrong business, no offence.

You can make money with any instrument, you just have to be familiar with all its intricacies.

 

[Ms Varima-Garch]

Quote from MTE:

If this is too much math for you then maybe you are in the wrong business, no offence.

You can make money with any instrument, you just have to be familiar with all its intricacies.

why do you accuse that i am stupid?

i want to trade the option like everybody else . .. i'm make scare of leverage plus another leverage in the triple etf . ..

 

[MTE]

Quote from Ms Varima-Garch:

why do you accuse that i am stupid?

i want to trade the option like everybody else . .. i'm make scare of leverage plus another leverage in the triple etf . ..

I never said that you are stupid! I just find it interesting that you want to trade options, yet a few compounding return calculations make your head spin. And that's in addition to the irony of your handle - varima-garch.