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Postby queerasmoi » 14 Feb 2009 05:08

I still ponder if one can short the constant leverage trap and come out better... but haven't the wits to try it.
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Postby Lado » 15 Feb 2009 07:43

I, for one, am happy that Canadians will finally have these products.

I respect Adrian2's thoughts but the example provided was beyond extreme. When has the S&P/TSX Composite ever moved 20% one day and 25% the next? Never. Let's consider a more reasonable example. If the index dropped 5% one day and then jumped back up 5% the next, the index would end up 0.25% lower and the HBP product would be unchanged. Furthermore, these products are meant to excel in declining markets. If you hold one of these products in a declining market you will be better off than holding cash.

The obvious catch with these products is that you must have a timer. As I said before, there is no such thing as a perfect market timer but there are definitely timers that will allow you to outperform a buy-and-hold (aka buy-and-forget-to-sell) strategy.

I provide equity curves for my Canadian and US models on my blog and the best performing models are long/short as opposed to long/cash. The obvious caveat is that past performance is no guarantee of future performance.
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Postby adrian2 » 15 Feb 2009 08:31

Lado wrote:When has the S&P/TSX Composite ever moved 20% one day and 25% the next? Never.

Those were just easy to grasp, round numbers. The principle is the same with lots of 1% moves up and down, which are pretty common.

Lado wrote:Let's consider a more reasonable example. If the index dropped 5% one day and then jumped back up 5% the next, the index would end up 0.25% lower and the HBP product would be unchanged.

So in this example, you would have lost 0.25% compared to an ideal inverse product. That's more than the XIU MER for a year (in two days!). Lather, rinse and repeat.

Lado wrote:Furthermore, these products are meant to excel in declining markets. If you hold one of these products in a declining market you will be better off than holding cash.

The product is meant to excel in a declining market on a daily basis. For anything longer than a day, in any kind of market, you make less, sometimes substantially less than first thought.

See for example how the double leveraged gold have performed last year: both the up and the down version have lost substantially.

Once again, the products work as advertised, but the key part is on a daily basis. Read again the underlined part and repeat: they are meant for day trades - anything longer and you're losing big money to a supersized MER equivalent (well in the double digits).
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Postby Lado » 15 Feb 2009 12:25

Adrian:

HBP's site is down this morning so I can't read the prospectus. If the ETF which will be the inverse of the S&P/TSX 60 operates the same as Proshares Short QQQ (symbol PSQ) then I am happy with that. One of my US models is based on buying Proshares Ultra QQQ (QLD) when my timer generates a long signal and buying Proshares Short QQQ (PSQ) when my timer generates a get-out-the-market signal. The compound annual growth rate for this model since August, 2006 is 48.7% (60% per year better than buy-and-hold) and it has a lower maximum drawdown than a buy-and-hold strategy. Since my US timer generated a get-out-of-the-market signal on June 11, 2008, my QLD/PSQ model is up 35%. Over the same period, the Nasdaq is down 36%. I'll accept the 1% difference! :lol:

Outside a RRSP account, you could short XIC or XIU if you wish to position your holdings in a manner which will profit from a market decline. You don't have that option for a RRSP so HBP's product will be welcomed by me.

If, years down the road, these products are wildly successful, you may be able to buy an inverse HBP ETF in a regular investment account and then sell covered calls to hedge your bets as I do with PSQ.
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Postby Lado » 15 Feb 2009 12:42

Adrian:

With respect to the leveraged (ultra) short ETF's, I'm not a fan of them. I haven't recommended that any of my subscribers buy QID (Proshares Ultra Short QQQ) but I show a QLD/QID model on my site just for curiosity's sake. My QLD/QID model currently has the highest CAGR but it has a high ulcer index and, for me, an unacceptable maximum drawdown.

I should have noted in my last post that my QLD/PSQ model has a CAGR which is 18% higher than my QLD/Cash model. That is, as far as my models go for the time period covered, one would have fared 18%/year better by buying PSQ after a get-out-of-the-market call than simply going to cash.
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Postby Alexo » 24 Feb 2009 16:57

queerasmoi wrote:I still ponder if one can short the constant leverage trap and come out better... but haven't the wits to try it.


Which self-directed RRSP provider has leveraged ETFs for shorting?

I'm thinking of shorting an equal $ amount of both directions (to avoid margin calls) and riding the trap.
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Postby adrian2 » 24 Feb 2009 18:25

Alexo wrote:Which self-directed RRSP provider has leveraged ETFs for shorting?

Any (discount) brokerage normally provides access to any stock (including ETF's) trading on NYSE / Nasdaq etc.

Alexo wrote:I'm thinking of shorting an equal $ amount of both directions (to avoid margin calls) and riding the trap.

Margin is calculated separately for each security, except combinations of options and stock for the same underlying. Shorting both ETF's would not result in a special margin calculation, you would still be required to maintain margin for both positions calculated independently.
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Postby Alexo » 24 Feb 2009 18:48

Hello Adrian, thank you for your reply.

Please understand that I am not arguing with you, as you are clearly more knowledgeable about these things than I am. I'm just trying to sort out conflicting signals so please bear with me.

adrian2 wrote:
Alexo wrote:Which self-directed RRSP provider has leveraged ETFs for shorting?

Any (discount) brokerage normally provides access to any stock (including ETF's) trading on NYSE / Nasdaq etc.

I'm with RBC direct. Called them today and asked if UYG or SKF is available for shorting. The rep checked and said neither.

adrian2 wrote:
Alexo wrote:I'm thinking of shorting an equal $ amount of both directions (to avoid margin calls) and riding the trap.

Margin is calculated separately for each security, except combinations of options and stock for the same underlying. Shorting both ETF's would not result in a special margin calculation, you would still be required to maintain margin for both positions calculated independently.

This is not what I understand from the RBC site. Quote (emphasis mine):
Margin Investment Account

When you qualify for a Margin Account, we will lend you a portion of the market value of your eligible securities. We offer competitive interest rates on Margin Account loans.

A Margin Account can also allow you to free up funds that would otherwise be used for your investments. Excess margin can quickly and easily be transferred to your RBC Royal Bank account. The margin-eligible securities in your RBC Direct Investing account would be used as collateral for the loan.

The outstanding loan value is initially determined using the purchase price of the security. However, from that point on, the outstanding loan value is generally based on the previous day's closing bid price for Canadian equities and the bid or last trade of the previous day for U.S. equities.

The difference between your present loan value per security and the original loan value per security vs. your debt, represents your Margin Call or Margin Excess position. If the loan value per security, based on present market price, is less than the loan value per security extended to you when you purchased the stock, (i.e. the stock price has dropped), your account is undermargined, unless you have other marginable securities to offset all of the undermargined position. Similarly, if the loan value per security is more now than at purchase, your account has excess margin.

Or did I misrepresent it?

Thanks,
Alex.
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Postby queerasmoi » 24 Feb 2009 19:07

Alexo wrote:Which self-directed RRSP provider has leveraged ETFs for shorting?

I'm thinking of shorting an equal $ amount of both directions (to avoid margin calls) and riding the trap.


I don't think short selling is allowed in an RRSP - you would have to do this in a taxable margin short account.

Adrian is right - you won't necessarily avoid margin calls. If there is a large movement over several days, your exposure to one of the ETFs will increase considerably, leaving you with net bull or net bear exposure.
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Postby Alexo » 24 Feb 2009 19:45

Hi queerasmoi, thank you for your reply.

queerasmoi wrote:I don't think short selling is allowed in an RRSP - you would have to do this in a taxable margin short account.

You are correct, no shorting or margin in RRSPs. Mea culpa.
Perhaps the new tax-free account will work though. If not, it's the taxable.

queerasmoi wrote:Adrian is right - you won't necessarily avoid margin calls. If there is a large movement over several days, your exposure to one of the ETFs will increase considerably, leaving you with net bull or net bear exposure.

I think I understand your point.
If I allocate 50% of available capital to short each direction and the underlying index moves 10%, after 5 days I'll be short ~145% of my capital and if my margin is say, 150% that's pretty close for comfort.
However, if I had shorted 100% I'd be in the same position after only 2 days so it still gives me some buffer to close my position.
I agree that I haven't worked out all the math yet, it's a work in progress...

But according to my understanding, that was not what Adrian said.
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Postby wolf411 » 24 Feb 2009 21:19

Alexo wrote:... Perhaps the new tax-free account will work though. If not, it's the taxable. ...

Shorting is not allowed in TFSA accounts... they have essentially the same rules as RRSPs.

The reasoning probably is that there might not be enough money in the TFSA (or RRSP) account to buy back the short, if the stock shoots up in price.
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Postby adrian2 » 25 Feb 2009 07:26

Alexo wrote:If I allocate 50% of available capital to short each direction and the underlying index moves 10%, after 5 days I'll be short ~145% of my capital and if my margin is say, 150% that's pretty close for comfort.
However, if I had shorted 100% I'd be in the same position after only 2 days so it still gives me some buffer to close my position.
I agree that I haven't worked out all the math yet, it's a work in progress...

But according to my understanding, that was not what Adrian said.

You are correct that shorting both will lessen the probability of a margin call compared to using the same capital and shorting only one side; my point was that it lessens it and doesn't eliminate the odds. Contrast this with a bullish option combination spread, say for a $65 stock that you don't own, you sell a $70 strike call and buy a $60 strike call - in this case, no matter what the stock does in the future, the options would not create a margin call by themselves.
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Postby adrian2 » 25 Feb 2009 07:29

Alexo wrote:I'm with RBC direct. Called them today and asked if UYG or SKF is available for shorting. The rep checked and said neither.

This just means that currently, their clients don't own them in a margin account - most likely because they are not too popular.
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Postby milo » 28 Feb 2009 02:30

adrian2 wrote:
randomwalker wrote:"Our four new single inverse ETFs will offer 100% of the opposite daily performance of Canadian benchmarks," said Howard Atkinson, President of BetaPro."

Key word in bold above - for any period longer than a day, in any market direction, the constant leverage trap works always against you.

Simple check:
day 1 - underlying drops 20% => fund gains 20%
day 2 - underlying gains 25% => fund drops 25%
overall underlying stays the same => fund lost money

In reverse:
day 1 - underlying gains 25% => fund drops 25%
day 2 - underlying drops 20% => fund gains 20%
overall underlying stays the same => fund lost money

Unless you plan to day trade, stay away.


Can one short this ETF (both types, bear and bull)? If yes, then would we eventually profit?
We could use the 2X to increase the gains when shorting
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Postby Norbert Schlenker » 28 Feb 2009 03:51

adrian2 wrote:
randomwalker wrote:"Our four new single inverse ETFs will offer 100% of the opposite daily performance of Canadian benchmarks," said Howard Atkinson, President of BetaPro."

Key word in bold above - for any period longer than a day, in any market direction, the constant leverage trap works always against you.

Simple check:
day 1 - underlying drops 20% => fund gains 20%
day 2 - underlying gains 25% => fund drops 25%
overall underlying stays the same => fund lost money

In reverse:
day 1 - underlying gains 25% => fund drops 25%
day 2 - underlying drops 20% => fund gains 20%
overall underlying stays the same => fund lost money

Unless you plan to day trade, stay away.

If my algebra is correct, the drag from these products is almost the same as that from the double longs. (The double shorts are ~3x worse.)

milo wrote:Can one short this ETF (both types, bear and bull)? If yes, then would we eventually profit?

They seem to be hard to borrow but IMO it would be pretty much a sure thing. The question I'm mulling is if HBP is coining money by doing exactly this (but they call it "unit creation", not "shorting").
Nothing can protect people who want to buy the Brooklyn Bridge.
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Postby milo » 28 Feb 2009 10:07

Norbert Schlenker wrote:
milo wrote:Can one short this ETF (both types, bear and bull)? If yes, then would we eventually profit?

They seem to be hard to borrow


meaning hard to short?
Has anyone successfully shorted the bear/bull HBP stuff?
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Postby banker » 08 Mar 2009 19:17

Lado wrote:I issued a "get out of the Canadian market" call on June 12. Since then, the S&P/TSX composite index is down 37.5%, HXD is up 57.3% and had you shorted HXU and covered at today's close you would be up 190%. Too bad HXD is difficult to short!

That being said, it is difficult to get a short call right since, in general, stock markets rise over time. Even one of the Dr. Doom's, Nouriel Roubini, didn't short the market. Heck, he didn't even sell his equities!


Hey Lado,

June 12th 2008 we EXTREMELY close to the all time high on the TSX. Congratulations, I abandoned my Buy-and-Hold Couch potato portfolio on Feb3rd, 2009 after much reading on risk control. I am not satisfied with the B&H approach. The low cost part of it is good, but I think it leaves alot to be desired in terms of risk control.

I'm not a mathematical genius and can't figure out how to calculate the ulcer index easily. Any suggestions for a fellow market timer enthusiast?

What other indicators are you using? I searched all over your site and its great, lots of info..but I couldn't find anything as to how your signals were being calculated.

Jay
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Postby Lado » 10 Mar 2009 10:58

Peter Martin created the ulcer index and his web site is http://www.tangotools.com/ui/ui.htm.

You won't find anything on my site to inform you how my timers are calculated since that is proprietary but I will say that it is a mixture of fundamental analysis and price momentum. The timers are trend indicators to a degree. I'll never get in at the very bottom of a market and I won't get out at the exact top. If you scroll to the bottom of my US Equity Curves page you will see equity curves going back to June, 2000 based on my US timer. In every case (i.e. for the DOW, S&P 500, Nasdaq and Russell 2000), using my US timer beat a buy-and-hold strategy.

The Canadian market was so strong from 2002 to 2007 that buy-and-hold worked well. Then came this turmoil we are in now!

If you want an Excel spreadsheet with the Ulcer Index in it so you can see how it is calculated, contact me through my web site.
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Postby banker » 10 Mar 2009 16:23

Thanks Lado,

I have read Peters site. I also sent an email to you via your site. Look forward to hearing from you.

How do you believe the model will work in a sideways market?
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Postby Lado » 10 Mar 2009 17:45

In a sideways market you have to look for alternatives that pay. I bought Bank of Nova Scotia a few days ago (first time I ever bought BNS) because the yield was 7.1%, I thought the dividend was safe (not that I am a bank analyst), and sold covered calls for a nice premium. Thanks to the rally today, I have an 11% gain in a few days. You're supposed to get lucky occasionally!

If the market gets stuck in a range for a period of months or years, it will be very difficult to make much money in my opinion. You could look for stocks that have a solid dividend (easier said than done) and sell covered calls.

If you are an experienced options trader you could consider iron condors.

You could consider seasonal price trends as I have discussed on my site and look at energy stocks between now and May.
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Postby banker » 10 Mar 2009 17:51

Lado wrote:In a sideways market you have to look for alternatives that pay. I bought Bank of Nova Scotia a few days ago (first time I ever bought BNS) because the yield was 7.1%, I thought the dividend was safe (not that I am a bank analyst), and sold covered calls for a nice premium. Thanks to the rally today, I have an 11% gain in a few days. You're supposed to get lucky occasionally!

If the market gets stuck in a range for a period of months or years, it will be very difficult to make much money in my opinion. You could look for stocks that have a solid dividend (easier said than done) and sell covered calls.

If you are an experienced options trader you could consider iron condors.

You could consider seasonal price trends as I have discussed on my site and look at energy stocks between now and May.


I used to be an trader for a NYSE based brokerage. I wasnt the one who made the models, merely routed them and confirmed executions. I remember doing many Iron Condor's...but after seeing the inside of the derivitives market I decided to never play in there. :)
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Postby Lado » 10 Mar 2009 18:51

As far as iron condors are concerned, I am in the learning stages and haven't executed any yet. I am in the process of setting up a thinkorswim account to execute these trades.
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Postby banker » 10 Mar 2009 20:36

Lado wrote:As far as iron condors are concerned, I am in the learning stages and haven't executed any yet. I am in the process of setting up a thinkorswim account to execute these trades.


Heres a great link to different option strategies, this used to be my homepage at one time so as I always had to reassure myself I got it right before I pulled the trigger :)

http://www.cboe.com/Strategies/DefaultEquity.aspx


Would be interested of your experience with ToS, TD bought them so seems like the discount brokerage industry is evolving again.
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Postby jwr » 11 Mar 2009 12:56

BetaPro Management Inc. Announces Launch of Single Inverse Horizons BetaPro ETFs

News release

BNN video clip

A bit of a rough start for HIF. It's behaving like a 4x inverse product today but maybe it's a volume issue from previous trading.
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Postby Lado » 11 Mar 2009 13:00

Not a product launch to be proud of is it?!
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