Author Topic: Short Selling Triple Inverse ETF's  (Read 3004 times)

Rockies

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Short Selling Triple Inverse ETF's
« on: May 02, 2017, 09:01:15 PM »
After drinking a few beers one day, I was trying to think why the too good to be true concept of shorting a triple inverse leveraged S&P 500 fund (like SPXU) would not work. My reasoning is that it basically is guaranteed to constantly plummet in value, especially in the long run (due to tracking error and the fact that the S&P 500 tends to go up in the long run) so shorting it would be a guaranteed way to make infinite money, right? 

It sounds too good to be true, and incredibly stupid, but I'd be interested in deconstructing the concept to learn:

Would this even be technically possible?
Why don't people do it?
Would it be legal?
Could you short something like this for many many years?


Don't worry - I'm not thinking about doing this (I dont even like buying individual stocks), I just think that learning about why it can't be done will help me understand the markets and how shorts work better. I was thinking that this concept could theoretically apply to any investment product with a really bad tracking error, as I am sure there are others out there.
« Last Edit: May 02, 2017, 09:05:07 PM by Rockies »

Heckler

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Re: Short Selling Triple Inverse ETF's
« Reply #1 on: May 02, 2017, 09:12:04 PM »
Please, don't try to blame this on the beer.  Beer is your friend.

Rockies

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Re: Short Selling Triple Inverse ETF's
« Reply #2 on: May 02, 2017, 09:18:11 PM »
I was also thinking that maybe I could take a second mortgage out on my home to triple short my leveraged short on a triple short S&P 500 fund.
« Last Edit: May 02, 2017, 09:24:11 PM by Rockies »

RichMoose

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Re: Short Selling Triple Inverse ETF's
« Reply #3 on: May 02, 2017, 10:14:10 PM »
You could. Don't forget that the max gain on an individual short is 100%. The loss is potentially infinite.

So why not just bet with the S&P 500 and take the infinite gain. Stay away from the 3x stuff though. Volatility on long term holds can severely erode gains. These products are designed for short term trading. Read the info packs on the providers website and you will understand how it works.

gerardc

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Re: Short Selling Triple Inverse ETF's
« Reply #4 on: May 02, 2017, 10:35:03 PM »
I'm guessing you won't be able to find any "seller" to short it from, but I don't know the mechanics of shorting. Following

beltim

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Re: Short Selling Triple Inverse ETF's
« Reply #5 on: May 03, 2017, 01:16:22 AM »
Would this even be technically possible?

Yes.
Quote
Why don't people do it?
High risk.
Quote
Would it be legal?
Yes
Quote
Could you short something like this for many many years?
Yes.

You can look here for more details, but I wanted to illustrate the high risk nature of this.  A 20% market drawdown is not uncommon.  Consider what would happen if the market fell 1% per day for 20 straight days.  A regular short would be down 22%.  A 3X short would be down (1.03)^20 = 81%.

DrF

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Re: Short Selling Triple Inverse ETF's
« Reply #6 on: May 03, 2017, 07:27:27 AM »
https://earlyretirementnow.com/2016/10/19/shorting-an-inverse-etf-is-a-bad-idea-or-why-beta-slippage-isnt-alpha/

This blogger says he has a PhD in economics and currently works at a large finance trading desk. His writing sounds like he's not making it up. Highly technical and thoughtful posts about early retirement.

Don't short an inverse etf thinking you'll make a fortune.

Financial.Velociraptor

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Re: Short Selling Triple Inverse ETF's
« Reply #7 on: May 03, 2017, 07:40:45 AM »
This is a bad idea.  If you can find a commodity that has both a normal and inverse levered ETF, you can short both to capture tracking error without exposing yourself to net leverage.  But it is still a bad idea as shares to borrow get scarce during price shocks.  You can either get stepped out at the wrong time or will pay "high" borrow fees. 

Where I have found great success is shorting UVXY (double levered ^VIX tracking) with OPTIONS.  I can't get stepped out of the trade and there are no borrow fees.  This is a peculiar security that is designed such that it declines over 80% a year.  You can't buy/short the ^VIX directly so they create a synthetic commodity by buying the 14 and 40 day futures and rolling them daily.  The normal state of affairs in such a scenario is known as "contango".  That is the 40 day future is more expensive than the 14 day future due to the extra time value.  So,  most days, they sell a 'cheap' security and use the proceeds to buy an 'expensive' one.  Plus it is double levered.

I report all buys and sells of this on my blog.  I've made as much as 500% annualized and as low as 16% annualized.  I have never lost money.  Don't get too large of a position size though.  ^VIX can sometime spike leading to a doubling in the price of UVXY over periods as short as a month.  You don't want a margin call.

Rockies

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Re: Short Selling Triple Inverse ETF's
« Reply #8 on: May 12, 2017, 11:25:59 PM »
I really appreciate all of the detailed responses and discussion, so thank you. Interesting to know that while it is possible, the risk of a large loss could be quite high.

MustacheAndaHalf

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Re: Short Selling Triple Inverse ETF's
« Reply #9 on: May 13, 2017, 04:41:46 AM »
There's some very important language in the typical description of 3x inverse ETFs.  Typically you see something about "during trading hours", meaning any market movements that happen immediately upon the market open are not reflected in the 3x inverse ETF.

Let's say something to impact the market happens on a weekend.  A fraction of a second after the market opens, high frequency traders have profited off the weekend event already.  This is long before the 3x inverse ETF has bought it's derivatives, and it will not profit from this market drop as a result.  Remember they only claim to track the market during the trading day - not in the first few milliseconds after the market opens.  Later, after the market has incorporated the information from the weekend, the 3x inverse ETF enters the market.

Check the description of the 3x inverse ETF, and look for language excusing them from trading the inverse return of the S&P 500.  Most likely, they are only tracking the market during the hours the market is open.

ChpBstrd

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Re: Short Selling Triple Inverse ETF's
« Reply #10 on: May 15, 2017, 07:29:50 AM »
SPXU has had a couple upward moves in the 20% range over the past 2 years. If you bought a put expiring around those times, it's game over, man. Until that point, it would have been a consistent cash cow. So it's kind of a musical chairs sort of thing. I'd recommend trying long duration puts and planning to get out with a least 3 months remaining. That would give you the chance to ride out a spike and maybe sell when it's closer to the trendline.

And when I say "try" I mean in a simulated trading account. If you can consistently make money in the sim, go ahead and add some excitement to life with $1,000. Who knows, you might earn your $1,000 back, and find a way to parlay the profits. More likely, you'll lose the game a few times and think "whew! Good thing it's a sim!"


hodedofome

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Re: Short Selling Triple Inverse ETF's
« Reply #11 on: May 23, 2017, 09:41:07 AM »
This is a bad idea.  If you can find a commodity that has both a normal and inverse levered ETF, you can short both to capture tracking error without exposing yourself to net leverage.  But it is still a bad idea as shares to borrow get scarce during price shocks.  You can either get stepped out at the wrong time or will pay "high" borrow fees. 

Where I have found great success is shorting UVXY (double levered ^VIX tracking) with OPTIONS.  I can't get stepped out of the trade and there are no borrow fees.  This is a peculiar security that is designed such that it declines over 80% a year.  You can't buy/short the ^VIX directly so they create a synthetic commodity by buying the 14 and 40 day futures and rolling them daily.  The normal state of affairs in such a scenario is known as "contango".  That is the 40 day future is more expensive than the 14 day future due to the extra time value.  So,  most days, they sell a 'cheap' security and use the proceeds to buy an 'expensive' one.  Plus it is double levered.

I report all buys and sells of this on my blog.  I've made as much as 500% annualized and as low as 16% annualized.  I have never lost money.  Don't get too large of a position size though.  ^VIX can sometime spike leading to a doubling in the price of UVXY over periods as short as a month.  You don't want a margin call.

^^^ This

I'm not using options but I do have a small VXX short position that I keep adding to over the years (on VXX spikes). I will also take larger short positions in VXX for trend following trades. Those trades will be stopped out if it goes against me enough, so I couldn't lose a bunch unless I had a position on and we had another '87 style crash.

The VIX ETP's are by far the best instrument to bet against because they have the most contango. Other commodity ETP's that have high storage costs typically have a good amount of contango as well, but nothing like VIX.

-------------------------------

As far as the OP goes, yes the tracking error of the daily rebalanced 3x ETF's for the S&P 500 can be pretty good over time, but the contango in VIX products is far better. There is no contango in the S&P 500.

To see it in action, take a look at the VIX futures curve here http://www.tradingvolatility.net/p/datasourceurldocs.html

Notice that the June contract price is $12.20. The July contract price is $13.15. That's a difference of 7%. I'm simplifying it but all things being equal, in July the price is going to drop from $13.15 to $12.20, and the VXX etf will drop 7% as well. It's like this a lot of the time. You add up 12 months of this and you see why VXX drops an average of 50%+ each year since 2009.

Some will say you can only make 100% on a short position, but they leave out that you can add to your short position. So if you short $100k of VXX and it drops in a year to $50k, you just add another $50k to your short. The next year it drops again and you keep adding. Now you're compounding those profits into something truly amazing.

Obviously you gotta watch your risk and make sure you never get a margin call. It's why I keep my VXX shorts no bigger than 10% of my trading account. I never know when VXX is going to spike 200%, 500%, or even 1,000%.

I've had no problems finding VXX shares to short from Interactive Brokers. Can't say the same with other brokers. Maybe if I had $100 million I might have issues.
« Last Edit: May 23, 2017, 09:43:46 AM by hodedofome »