I'm having a hard time working through something, and it's tangentially related to some of the topics on this thread, so I was hoping to throw them out there and see what advice I can get, or direction.
Some of the volatility strategies that have been discussed on here involve buying/holding XIV or VXX to capture either increases in value on the volatility markets or capture contango/backwardation, buying options on XIV or VXX, or buying options on leveraged ETFs to capture the same thing.
I'd only ever be interested in going long on options of an ETF if I was comfortable owning the ETF directly. If not, I'd be putting a leveraged play on an asset that I would never own, which doesn't compute for me. So before I can say that I'd feel comfortable owning options on an leveraged volatility ETF long term (UVXY), I'd have to decide if I feel comfortable owning a leveraged volatility ETF long term.
People have advised me, repeatedly, to stay away from long positions on leveraged ETFs. Many articles discuss how you'll be killed by holding long positions on leveraged ETFs as a result of Leveraged Decay, Volatility Drag, or the constant leverage trap (discussed more in depth here
https://pensionpartners.com/leveraged-etf-myths/ with a good chart showing almost guaranteed loss over a long time period here
http://etfdb.com/leveraged-etfs/leveraged-decay-the-dangers-of-long-term-investing-with-etfs/ and here
http://etfdb.com/media/W1siZiIsIjIwMTUvMTAvMDYvOTNmaWdiZXRic19Fcm9zaW9uX29mX1BvcnRmb2xpb19WYWx1ZS5wbmciXSxbInAiLCJ0aHVtYiIsIjc1MHhcdTAwM2UiXV0/Erosion%20of%20Portfolio%20Value.png).
But when you compare long positions taken in x2 and x3 ETFs (like SSO and UPRO) over progressive periods of time, I can't find massive losses of value from leveraged decay or volatility drag. Granted, due to compounding leverage, many of the ETFs over long periods don't produce guaranteed x2 or x3 mirrors of the underlying asset and may produce significantly more or significantly less, depending on the direction, but the actual returns over the past 8 years or so are actually much better than the underlying ETF (in the past 10 years s&p 500 is up 103.7% while x2 SSO is up 230.7%, which makes it over the long term a x2.22 instead of a x2 - - - - and the s&p 500 is up 209.7% in the past 8.5 years while the x3 UPRO is up 2,225.4%, which makes it over the long term a x10.6 instead of a x3).
So where's the volatility drag, the increased fees, and the massive loss of equity?
No doubt they are SIGNIFICANTLY riskier assets, as in down markets you'll lose more than x2 or x3, but if you believe you'll make money in the underlying asset, why not go for the leveraged asset? If you believe VXX is a good play, why wouldn't UVXY be a good play?
While I can find significantly more articles on why you SHOULDN'T own leveraged ETFs long term, there are a very few that say its ok (
https://seekingalpha.com/article/2986586-what-the-numbers-say-about-long-term-investments-in-leveraged-etfs for example).
So what am I missing here? Why am I not seeing the massive decrease in value over long periods of time that all the articles say I should be seeing? Or is my snapshot of time (8 years, 10 years, ect.) just poor snapshots of time to be looking at?