Both of these bear-market ETFs show a breakout from a flag-formation. Based on the adage "the flag flies at half-mast," targets for these two are attractive, indeed. Point & Figure targets for the two are ERY: 39.5 and TZA 38.0.
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Hi Ran. (you have the same name as a great movie, by the way, I highly recommend it, with Japanese subtitles, having only watched it a few weeks ago.)
ReplyDeleteI had a good week with SRS,DPK,EDZ,ERY.shorted MAC too. Anyway.. thought about shorting tech but with the Goldman upgrades I think it's too early. After AAPL earnings perhaps. Banks too risky to play now either way.
Wanted to express an idea you've likely already tried. Shorting these daily 2/3x ETFs can be very profitable. I am short SRS from 23.50 today. All it takes is one or two up days and the bear etfs collapse in decay. The underlying index doesn't even have to go up much. For example not long ago SRS was at 18 and IYR was at 35. IYR only has to go up to about 32 to send SRS back there. The compounded setbacks make it very difficult for the leveraged ETFs to climb and hold in price, making them perfect short candidates.
Have a good weekend
Ron
Hello Ron. Thanks for the pointer to the movie. It sounds intriguing--a Japanese King Lear.
ReplyDeleteDoes your method work better than buying the mirror ETF? For example, when ERX shows a top, would shorting ERX work better than going long ERY?
Your method obviously worked well for you. Thanks for your insights. I will definitely be trying to answer the questions it has brought up.
Ran
That movie was great. I'm not even familiar with the King Lear storyline or if it was intentional.
ReplyDeleteok. The answer is there is no advantage to buying the bull or bear at all, either intraday or compounded. The ultrashares (2x) are freely available to short. my experience is that it's more difficult to get shares to short the 3x, although put options or shorting call options are always available. Selling a call on any of the 3x ETFs you may own is highly recommended as they fetch a good premium you can bank, even when the deadline approaches.
The reason why it's better to short the leveraged daily of your choice than own either is evident if you hold for more than one day. If bullish, short the bear. If bearish, short the bull (obviously).
This is because the daily compunding damages the price per share of these vehicles.
Here's an example - let's say over the course of 10 trading sessions the underlying index goes like this on a percentage basis: +1,-1,-.5,+1.5,+1,-2,-1.5,+1,+.5,-1.
That's a net of -1% in those 10 sessions.
With daily price compounding, however, look at the price effect on:
2x Bull starts at $10. goes (+2%,-2%,-1%,+3%,+2%,-4%,-3%,+2%,+1%,-2%) = $9.774 or a loss of 2.26%, not a loss of only 2%. This is a "decay ratio" of 13%.
2x Bear starts at $10. goes (-2%,+2,+1,-3,-2,+4,+3,-2,-1,+4) = $10.373. This is a gain of only .0373% not 4%.
The matter gets much worse with larger percentage moves than 1%.
woops i messed up on the final entry..
ReplyDeletecorrected:
2x Bear starts at $10. goes (-2%,+2,+1,-3,-2,+4,+3,-2,-1,+2)= $10.173.
This is a gain of only .0173%, not 2%.