Friday, October 1, 2010

UPDATED: "Shorting Leveraged ETF Pairs (FAS, FAZ: SPXU, UPRO)"

Back in April '09 we posted:
Direxion 3x Financial ETFs Go Certifiably Crazy (FAS; FAZ etc.)
in which I commented:
"One approach is to short both of them, in effect writing an option. Ooops, have I said too much?"
We followed up with CXO Advisory's take on the strategy in September of that year. They said:
...In summary, shorting pairs of 2X and -2X leveraged ETFs may pay off over long periods as rebalancing effects grind on fund values, but data for guiding inference is skimpy and somewhat "wild."....

Here are the results of the strategy since that first post, via BigCharts:

Cool huh? One short goes against you 60% while the other goes in your favor 90%.
If only they had 6X leveraged ETF's! You'd get 4% per month (approximate, it depends on the implied volatility of the options) on a mirror image pair trade as the rebalancing scrapes off the time premium of the options in the ETF.

HT for the reminder: Shocked Investor who had a six-month chart in his post:
3X ETFs and 2X ETFs: Don't Walk, Run! Weapons of Mass Financial Destruction