Originally Posted by
Dr. Dave
Man - I hope that guy is day trading or swing trading FAZ like you are supposed too. Like I said before most people don't understand leverged ETFs and how their values are derived from options, swaps, futures, etc. With options decay, it kills you going when the market goes sideways. Example, FAZ supposedly is 3X on a daily basis in the opposite direction of RIFIN. However, when the vix is low, you get less oomph up in FAZ when RIFIN goes down or sideways, then when volatility is high. This makes it lose correlation to the underlying over time.
So...
Looking at the last sideways movement of RIFIN using a weekly chart, the open from the beginning of Sept was 768.03, today it is at 759.83 for a loss of -1.07%.
Now, if you wanted to be short financials, and wanted 3X, you could actually short IYF, but just do 3 times the amount. During this period, the change was minute, so your gain would be 0.58% times 3 or 1.74% if you shorted 3X the amount of money (it's a little off since IYF isn't truly RIFIN).
FAZ on the other hand, while trying to replicate 3X daily over a long period of time becomes uncorrelated to that ratio over time... thus, during that same period it opened at 23.50, and closed at 19.51 today... so did FAZ gain 3X and print a 3.21% gain (1.07% times 3)? Nope, it lost actually, while RIFIN is down -1.07%, during that same period and FAZ is not only not up 3.21%, but actually down -16.98%.
Now with a rapid decline in price in RIFIN and a rise in volatility, you can make that up, but not on a slow decline in price.
So, if you guys are planning on going short, go short for real, don't use FAZ and the like to do it, unless you know the risks and read volatility, or do the alternative, day or swing trade them. In which case, you can do likewise with FAS or going short FAZ depending on the direction of the day or swing.
I know I posted this crap before, just don't want anyone thinking these leverged ETF's are for holding for 2 weeks or more. You'll lose the price correlation to the underlying, and then it's just luck whether you are right or not, unless you can get a feel for volatility as well and how it correlates to the underlying, but when plotted, there isn't an easily recognizable correlation. If you think the market is turning down, and want to dollar cost average going short, just go short on a regular ETF. As you can see, if you went short IYF back in Sept waiting for a downturn, you'd be up today, but not down like FAZ.
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