I'm considering buying into a 3x leveraged ETF, but I'm not sure how to do it. Would it be safe just to buy and hold? Should I buy options contracts? Should I place a stop order on it with my broker? Etc.
I'm considering buying into a 3x leveraged ETF, but I'm not sure how to do it. Would it be safe just to buy and hold? Should I buy options contracts? Should I place a stop order on it with my broker? Etc.
If you have to ask these questions, it isn't the right investment for you.
They degrade quickly and are not suitable long term investments.
If you really want to gamble with them and expect a large move in the underlying security buy calls or puts on the ETF near expiration.
I've turned a couple hundred .05 calls into .50 calls upon expiration.
I lose 80% of the time, but the few 10 baggers I make put me in the green and more.
If you know the math this kind of trading is easy and fun.
run away! run away!
Morgan Stanley put out a piece on leveraged and inverse ETFs back in October. Good piece that explains why you can get the directional bet right yet still lose money in an inverse or leveraged ETF.
Obviously the report isn't on line, but if you know someone who works there or has an account there, you should get your hands on it.
Depends on your time frame:
Swing trade 1-3 days - they are good.
Trend Following 2-3 months - terrible
Don't forget you can get 100% leverage from your broker. So the value of a double ETF is questionable for a retail investor.
Good arb opportunity is to pick an ultrashort and an ultralong based on the same asset class....and short them both.
Rick Santelli wrote:
Good arb opportunity is to pick an ultrashort and an ultralong based on the same asset class....and short them both.
doesn't work - you have to adjust the ratio daily, or you end up being net long or short.
Check out FAS vs. FAZ. Both are 3x leveraged financials, one short, one long. After 1 year here is what happens:
Now look at July and September 2010: BOTH are (together) down 18%!!!
If you want to understand why, google "leverage decay". I am not sure you can short them, but regardless, the main problem there can be margin calls due to short term volatility. I would argue against their use in general other than day trading as well as 1-3 days, maybe a week if you have an idea why.
Otherwise look into call options, or spreads (vertical). The drawback there is that you need to time it, but again, leveraged ETFs are also short term use.
Hey thanks everyone for the advice. I read an article about it in Forbes a few weeks back and didn't quite understand why it would be a bad idea. My suspicions are confirmed, so I'm glad I checked in here first before pulling the trigger.
Look wrote:
Check out FAS vs. FAZ. Both are 3x leveraged financials, one short, one long. After 1 year here is what happens:
I understand why. This is a directional bet, not a market neutral bet. As the position moves, you incur directional market risk. In this case w/ FAS/FAZ, you would have won (assuming you can get borrow)
If you know anybody who has actually put this trade on and made money, I'd love to hear about them. I know people who have and lost. The only ones who have won are those who are naturally short - the issuers.
Feb 5 2010 Feb 4 2011
FAS 65.52 31.12 (3:1 split)
FAZ 20.69 8.21
so for simplification, lets assume you short 1:3 2/5/2010, total -6552 and -6207 = 12759. One year later, this position is 9336 + 2463 = 11799. So you made $960. This assumes you can hold 100 short when it splits to 300.
You see the % changes and think "this looks great". But actually putting this position on requires a readjustment of your position to remain market neutral. As of Friday, you are over-hedged on the long side by almost 4x. So a strong bull move will wipe you out.
Not very profitable unless u continually rebalance.
hahahahahahahahahahahahahahahahahahahahahahahahahaha!!!!!!!!!!!!!!!!!!
Wait, hypothetically lets say I don't want to hedge my position and I just feel very strongly that the US market will surge while emerging markets will go down over the next, lets say 6 months. Would it be safe to invest in a 2-3x S&P fund and a emerging markets short fund and just hold? And by safe, I know that there are high risks that I could be wrong, but what are the other risks?