inverse ETFs / ETF shorts

T

toady9_IHB

New member
Does anyone invest in inverse ETFs / ETF shorts like SDS or RSW?



Basically they are leveraged to go up when the market goes down.



Is it like investing in any ETF without the risk of getting burned badly making an individual short sale?



Perhaps a good investment vehicle if one thinks the bear market is here for awhile?
 
I need to be nice to the newbies, but I do recommend doing a search on this with possibly adding acpme in the search since I recall he gave a great break down of the ultra short ETFs.



I will add that I have traded the options on the ultra short ETFs. I like how the volume has increased on the options for these ETFs and how you can take advantage of some quick pops. Of course that is not for everyone, and you could lose your a$$ if you bet wrong.
 
if you're confident in the direction of the market, those etfs are great. personally i think thats a very unwise way for most ppl to invest. since most people are completely long-biased in their retirement accts, if you want to buy a bit of an inverse etf on the side as a hedge, that makes a lot of sense though. your returns would negate each other but in this market there's a good argument that flat returns are good returns.



by risk, i assume you don't mean volatility. because technically, the inverse has the exact same volatility as the index. the ultrashorts have twice the volatility. the ultrashort financials etf SKF since beg of june has gone from 110 to 200 back down to 110. if you find that kind of volatility will make you squeamish, stay away form the ultrashorts.



if what you mean by getting badly burned, you mean the risk of being wrong, well... that's up to you to decide.
 
I guess what I mean by getting "burned", it's not like placing a short order where you could end up having to pay back whatever price it ends up but the most you risk in this ETF is how much you put in and no more, correct?



Graphix, I've posted here before, not sure why it says 1 post. Don't let that get to you. Joined just a few months after you.
 
in that case yes, if it's any consolation, you can only lose 100% of what you invested :)



SKF is volatile enough for me i can't imagine how graphix trades in the options!
 
[quote author="toady9" date=1218756679]I guess what I mean by getting "burned", it's not like placing a short order where you could end up having to pay back whatever price it ends up but the most you risk in this ETF is how much you put in and no more, correct?



Graphix, I've posted here before, not sure why it says 1 post. Don't let that get to you. Joined just a few months after you.</blockquote>


That's cool, and I see that you joined a long time ago. Must have been something funky when we switched over the software. Plus, I really am making an effort to be nicer to newbies/old timers who may have missed a post from the past.



You are right, it isn't like a short order where you are borrowing the shares and getting burned by a margin call. You can get burned by buying at too high of a price and it dropping fast and hard. So my question is are you looking for a good trade, or are you looking for a hedge? IMO they were designed more as a hedge, but if you are a nutter like me you trade them.



<blockquote>SKF is volatile enough for me i can?t imagine how graphix trades in the options!</blockquote>


That is actually why I trade the options. I mainly stick with SDS, but I have traded call options on SRS. You could have bought the 65 strike calls on Monday for $.50 and sold for $1.50 yesterday, while buying the 65 strike puts for $.50 and selling them today for $1.25. I know, it sounds sooooo easy, but I have also bought at $1.50 and sold for $.50 too. Good times, and volatility and I have become good friends this year even if he has been a really busy guy lately.



Disclosure: I am a self proclaimed nutter. This is not to be considered investment advice, and in fact it shouldn't be considered advice at all. If you decide to trade options on any security, you risk losing all your money and an infinite amount if you write options. You would have to be a nutter to do that, and it might be best to leave trading options to the certified nutters.
 
I've invested heavily in some of the double short ETFs such as SKF, SRS, QID and so forth. They're all very volatile so you have to be willing to stomach the volatility. For now, I'm holding them and not trading them.



You should be aware they all have some error in the tracking of their underlying index. They tend to overshoot upwards when people are quickly piling into them, and overshoot downwards as people sell them quick. The "double" shorts also suffer from a quirk known as time decay, whereas over long periods changes in the ETF tend to get slightly nullified - it's nothing about the ETFs themselves, but more about the way the math is applied to the price series.



For example, the dow jones financials index is down -30% over the last 12 months while the double short SKF is only up 30% over the same period; time decay and tracking error has eaten away all the "doubling". Tracking error however can go to your advantage as well, at its peak SKF actually had a +143% return over the last 12 months whereas the index was only down down 45%. The extreme downtrend in SKF that ensued afterwards just killed SKF's advantage, for now. Double shorts are blunt weapons.



I also have puts on individuals banks, puts being a lot less "blunt". But the timed nature of puts means if markets stay "irrational" for long enough I could lose 100% of my investment even if I am proven right in the end.



I think you need a whole lot of conviction to bet against the banks right now - the problems are widely known and it's only a matter of how bad people things are going to get in the mind of people. I have the conviction, but it still doesn't make it easy.



Though frankly the entire market seems rather hard. Commodities are one the few remaining asset classes that is still up year-on-year, but the trend is definitely not their friend right now.
 
Ok thanks for the helpful info. Yeah I'm def not a nutter, but am viewing this more as a hedge. Basically, I feel like things are still going to go south, so why not take advantage of it with these inverse ETFs. But you're right, the problem is buying at at the wrong moment.
 
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