Shorting Leveraged ETFs? (Scottrade, margin, daytrading, invest)

[classic216]

there's the SDOW (-3X Inverse of the Dow Jones Industrial Average)

there's the SDS (-2x Inverse of the S & P 500)

given the nature of daily compounding..........these ETFs are self-destructive.
They gravitate towards zero over time.

The S & P 500 could gain 10%, then lose 10%, so it would be right back where it started.......
and the SDS would still lose money!


I know some people say you can short PAIRS of leveraged ETFs that are opposite of each other
(the SDOW -3X and the UDOW +3X).........but you know what, that doesn't always work because the UDOW has gone up more than the SDOW has gone down.
If the Dow Jones goes UP in the long haul........why not just short the Inverse?


Shorting Inverse leveraged ETFs. Good idea? share your thoughts.

why would you invest in anything else when you can get 2X or even 3X returns?

[classic216]

and those of you saying "they don't allow it" ---- yes they do, I've done it on Scottrade.

[BigCityDreamer]

Sounds like a plan to me. If it works, then it works. Always remember that hindsight is 20/20. Be very careful about losses, which will get magnified.

BTW, why would you short SDOW when you can get a much greater gain by going long on UDOW? At least that's what it appears to me.

[LongArm]

Originally Posted by classic216

I know some people say you can short PAIRS of leveraged ETFs that are opposite of each other
(the SDOW -3X and the UDOW +3X).........but you know what, that doesn't always work because the UDOW has gone up more than the SDOW has gone down.

It doesn't always work SHORT-TERM, because with this strategy, the trend is NOT your friend. If the market's trending up OR down, you will get behind until the market has its inevitable corrections and volatility, at which point, the trade will rather quickly get into the green.

If the Dow Jones goes UP in the long haul........why not just short the Inverse?

Well, sure, if you KNOW that the market is going to continue up (OR down), there are many ways you could make a killing, no? The idea is that by shorting the PAIR, it doesn't matter which direction the market goes because they offset each other, for the most part, sustained trends aside.

[Sage 80]

Originally Posted by classic216

given the nature of daily compounding..........these ETFs are self-destructive.

They can be if you don't have a solid plan of how to trade them.

Originally Posted by classic216

Shorting Inverse leveraged ETFs. Good idea? share your thoughts.

Traders with little experience should avoid these. They are meant for daytrading only.

[BigCityDreamer]

Originally Posted by Sage 80

They can be if you don't have a solid plan of how to trade them.

Traders with little experience should avoid these. They are meant for daytrading only.

But UDOW went up 87% from November 15 to May 21 though.

If you maxed on margin, then that's a 174% return. Am I wrong in this calculation?

[LongArm]

Originally Posted by BigCityDreamer

But UDOW went up 87% from November 15 to May 21 though.

If you maxed on margin, then that's a 174% return. Am I wrong in this calculation?

The reason I said above that "the trend is not your friend" when shorting a pair of leveraged ETFs is because, in a trend, leveraged ETFs can actually OUTPERFORM their DAILY objectives (in this case, 3x the performance of the Dow) over the life of that trend, however long it lasts. Such is the case with UDOW, which returned about 4x the Dow over several months, rather than 3x. That's great for someone going long UDOW only, but not so good for someone shorting the UDOW & SDOW pair, because the performance of UDOW would create a paper loss on the pairs trade until the INEVITABLE correction happens and you have more typical "up and down" action in the market.

The reason triple-leveraged ETFs are really best for short-term trading is because 1) naturally, trading anything that moves that much is risky, and 2) over time, these things will ALWAYS decay because there will always be more non-trending, up and down periods in the market than there will be sustained trends. And it's that "up and down" action combined with the daily resetting of leverage that causes the decay. (It's a mathematical thing.)

Now, if you're so good that you can accurately predict sustained trends (like the one that started last November), then sure, you can make a killing on 'em over longer periods.

[Sage 80]

Originally Posted by BigCityDreamer

But UDOW went up 87% from November 15 to May 21 though.

If you maxed on margin, then that's a 174% return. Am I wrong in this calculation?

I guess you're in the right ballpark. It's hard to tell exactly because during the times it would have been going against you, it would have compounded overnight, which means you would have lost at an accelerated rate (more than 3x).

However, such a trade would have been very risky. Only highly skilled traders should carry these types of ETFs overnight because of the compounding when price goes against you.