How to trade TSLS?

[Fru-Gal]

I don't understand inverse ETFs. Do you just hold it for a few hours? What's the risk? It's $11.21 a share right now. I'd do it through Robinhood. Or buy tonight with some kind of limit for tomorrow (not sure I can buy it after hours)?

[achvfi]

Don't gamble with your money. Just invest it. These are trading vehicles not for investors.

[Herbert Derp]

Shorting stocks is not investing, it’s swing trading.

If you want to invest against Elon Musk, I recommend investing in his competitors like BYD, Rivian, and Rocket Lab.

[Fru-Gal]

Shorting stocks is not investing, it’s swing trading.

If you want to invest against Elon Musk, I recommend investing in his competitors like BYD, Rivian, and Rocket Lab.

Already invested in some of those (you missed my fave, LUNR). Also am FIRE, so this is funny money gambling, definitely not investing. I'm just wondering what the play would be if I buy a couple shares at $11. Robinhood already advises not to hold for even a day, unless you are "an advanced investor", which is interesting. Anyway it's confusing to me that they're saying the risk is high... not really that different from any of my penny stocks if it's not on margin. I assume just more volatile?

[Fru-Gal]

OK I read the prospectus:

***
Direxion Daily TSLA Bull 2X and Bear 1X Shares
The Direxion Daily TSLA Bull 2X Shares and Direxion Daily TSLA Bear 1X Shares seek daily investment results, before fees and expenses, of 200% and 100% of the inverse (or opposite), respectively, of the performance of the common shares of Tesla, Inc. (NASDAQ: TSLA).

Investing in the funds involves a high degree of risk. Unlike traditional ETFs, or even other leveraged and/or inverse ETFs, these leveraged and/or inverse single-stock ETFs track the price of a single stock rather than an index, eliminating the benefits of diversification. Leveraged and inverse ETFs pursue daily leveraged investment objectives, which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying stock’s performance over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments. The Funds will lose money if the underlying stock’s performance is flat, and it is possible that the Bull Fund will lose money even if the underlying stock’s performance increases, and the Bear Fund will lose money even if the underlying stock’s performance decreases, over a period longer than a single day. Investing in the Funds is not equivalent to investing directly in TSLA.
***

So yes, you hold for no more than a day. It still can't go negative, right? It's not like margin. You can lose your money, but not more than what you put in?

[Herbert Derp]

It sounds like an awful investment. They are saying that their fund can still lose money, even if Tesla stock goes down over time.

Which kind of makes sense. If Tesla goes bankrupt, TSLS will also become worthless in time. You can’t be the inverse of something that doesn’t exist! And the ETF people are siphoning money out to pay themselves all along the way.

In my experience, a lot of ETFs and managed funds in general are a sort of scam to get investors to invest in some sort of hype, while the fund managers get rich by taking 2% of the money for themselves each year. The fund managers are protected because they are investing other people’s money. Their primary incentive is to keep the hype train going so that suckers will keep investing in their funds and they can continue to extract their 2%.

Cathie Wood and her ARK funds would be a great example of this. She and her people made out like bandits while her investors lost money.

[Fru-Gal]

OK, once again answering my own question:

The reason why you might want to use an inverse ETF vs short selling is that there is a limit to the downside, unlike shorting. Also, even though the fees are high, they might be less than margin interest rates and the fees for borrowing shares.

However, I can’t really see how you could make much with it. If TSLA drops 3% tomorrow, TSLS might go up 33 cents a share. But since you aren’t advised to hold for more than a day, that’s it.

[Telecaster]

OK, once again answering my own question:

The reason why you might want to use an inverse ETF vs short selling is that there is a limit to the downside, unlike shorting. Also, even though the fees are high, they might be less than margin interest rates and the fees for borrowing shares.

However, I can’t really see how you could make much with it. If TSLA drops 3% tomorrow, TSLS might go up 33 cents a share.

Why not buy puts?   

[Fru-Gal]

OK, once again answering my own question:

The reason why you might want to use an inverse ETF vs short selling is that there is a limit to the downside, unlike shorting. Also, even though the fees are high, they might be less than margin interest rates and the fees for borrowing shares.

However, I can’t really see how you could make much with it. If TSLA drops 3% tomorrow, TSLS might go up 33 cents a share.

Why not buy puts?

First off, because I don’t understand options trading. Second, not clear if puts have a risk of a loss beyond the premium paid, vs. an inverse ETF.

[MustacheAndaHalf]

Correct about not going negative with ETF shares - you can only lose your investment.

I found the following quote from the $TSLS prospectus more customized than the boilerplate comment all leveraged/inverse ETFs use:

Each Fund seeks daily inverse investment results that are subject to compounding and market volatility risk. The pursuit
of their daily investment objective means that the return of a Fund for a period longer than a full trading day will be
the product of a series of daily returns, with daily repositioned exposure, for each trading day during the relevant
period. As a consequence, especially in periods of market volatility, the volatility of the underlying security may affect
a Fund’s return as much as, or more than, the return of the underlying security. Further, the return for investors that
invest for periods less than a full trading day will not be the product of the return of a Fund’s stated daily inverse
investment objective and the performance of the underlying security for the full trading day. During periods of high
volatility, a Fund may not perform as expected and the Fund may have losses when an investor may have expected
gains if a Fund is held for a period that is different than one trading day.

https://connect.rightprospectus.com/Direxion/TVT/25460G260/P?site=Funds
(this link takes awhile to load the PDF)

I've never used -1x ETFs, only -2x and -3x ETFs.  To show how those perform, I typically find two dates where the underlying asset (like $TSLA) had the same price.  Telsa's volatility makes this difficult, so the closest I can find is $290.80 (Wed close, 2/26) versus $288.53 (Nov 6 2024).

2025-02-26 vs 2024-11-06
$TLSA: $290.80 / $288.53 = +0.79%
$TSLS: $10.73 / $11.93 = -10.06%

https://finance.yahoo.com/quote/TSLA/history/
https://finance.yahoo.com/quote/TSLS/history/

Based on a nearly 11% gap over less than 4 months, I would avoid $TSLS.

[MustacheAndaHalf]

The first book I read about options was "Understanding Options 2E"
https://www.amazon.com/Understanding-Options-2E-Michael-Sincere-ebook/dp/B00GWSXX8U/

If you "sell" or "write" an option, you can suffer unlimited losses.  Your account will show a negative value for the number of "contracts", and you must either buy those back or pay what is owed when the option expires (if anything).  That is high risk, and brokerages require additional agreements be signed before you write options.

Buying an option limits your loss to what you invested.  Your account shows a positive number of contracts, with each contract involving 100 shares of an underlying asset (or index).  When prices change rapidly, that makes profits on options more likely, so the price of the options goes up.  Volatility has an impact on the price you pay for options.

With an option, you are guaranteed a specific profit if the asset reaches a specific price.  You can sell earlier, to profit from volatility, but if you exercise the option, your profit is always the same for a given price of the asset.  That is an advantage over leveraged ETFs, where the path an ETF follows impacts its performance.  This guarantee is why I like options better than leveraged ETFs.  I prefer to buy when markets are not volatile, and wait until the market moves in the direction I predicted with increased volatility.

I currently don't hold any options.

[Financial.Velociraptor]

Most of the leveraged and inverse ETFs, buy options or futures calendar spreads and roll them DAILY.  This is very expensive commission wise and suffers from a problem known as CONTANGO.  Short version is on a normal day, they are compelled to sell a 'cheap' asset to buy a more 'expensive' one to do the daily roll.  That is, if TSLA were to go up and down by exactly one dollar every other day, ending at the same place, the contango would leave your investment down by probably quite a lot, despite the underlying trading flat!

This is why you ordinarily hold these instruments for less than a day. 

If you buy a put, your maximum loss is equal to the price you paid for the put that is the price cannot go negative on you.  The put will have "time value" however, that decays to zero at expiry.  That is, if TSLA goes up or trades flat, you eventually end up with 100% loss.  If it goes down, you leverage your gains.

[MustacheAndaHalf]

Most of the leveraged and inverse ETFs, buy options or futures calendar spreads and roll them DAILY.  This is very expensive commission wise and suffers from a problem known as CONTANGO.  Short version is on a normal day, they are compelled to sell a 'cheap' asset to buy a more 'expensive' one to do the daily roll.  That is, if TSLA were to go up and down by exactly one dollar every other day, ending at the same place, the contango would leave your investment down by probably quite a lot, despite the underlying trading flat!

Not just futures, but swaps.  Banks want fixed income streams, so they sell the performance of equities in exchange for a fixed payment.  Leveraged ETFs want the performance of an asset, and are willing to pay banks a fixed percentage of the value of the asset.  The ETF mentioned in this thread is run by Direxion, who also has a detailed explanation:

"Swap - A derivative in which two counterparties agree to exchange one stream of cash flows for another stream."
https://www.direxion.com/education/understanding-leveraged-exchange-traded-funds

[Fru-Gal]

Thanks for these explanations.

[ChpBstrd]

OK, once again answering my own question:

The reason why you might want to use an inverse ETF vs short selling is that there is a limit to the downside, unlike shorting. Also, even though the fees are high, they might be less than margin interest rates and the fees for borrowing shares.

You are correct about all the above. Shorting or paying someone to short on your behalf can be expensive.

The issue with these daily leveraged funds is that you probably aren't making a one-day prediction or trying to hedge a one-day bullish bet. You are probably making a 6-12 months prediction, but understand you cannot predict daily moves. Thus your timeline (6-12 mos) is out of alignment with TSLS's timeline (one day). You need a vehicle that cheaply delivers the desired outcome on the timeframe your prediction is valid.

If I was going to short the stock of a company whose CEO was lighting the brand's equity on fire, I would choose options, as others suggested. Option pricing is, in part, based on the much lower risk-free rate of return, not TSLA's short interest rate. Instead of paying some douche on Wall Street to make daily swaps and futures trades on your behalf, you just pay a buck or two commission to trade the options. The time decay of a 9 month put option, for example, might be less than the typically daily contango losses @Financial.Velociraptor mentioned.

But your wariness is warranted. NEVER trade options without a THOROUGH understanding of what the contracts mean and the entire range of potential consequences. One must do their homework or else not throw money at it. As others have noted, when you BUY an option, the most you can lose is 100% of what you paid, whereas if you SELL an option the losses can expand to much bigger numbers than the amount you received. So you could just buy a put option, as others have suggested and only risk the amount you spent. But I'm suggesting doing the homework first. Maybe buy the put in a paper trading account, or on a post-it note.

So your cost of shorting is either to pay the Wall Street douche and endure the costs of having your timeframe misaligned with your financial instrument, OR put in several hours worth of reading to fully understand options and then get the lower cost. I think the latter is the Mustachian way, because it builds up a skill that you might need later and locks in a lower cost of doing things.

Let me know if you're interested in the educational path, because there are some links I could share.