Pascal
03-26-2015, 07:02 AM
In the Pyramid book, I have a whole chapter about trading leveraged ETFs, taking the TNA/TZA and DUST/NUGT examples.
Leveraged ETFs use options to mimic market moves. The options could be illiquid and are always victim of time decay. This means that a triple leveraged ETF cannot move exactly three times what the index is doing.
I also show in my book that it is always better to short the inverse ETF instead of buying an ETF.
If you did not read this chapter and want to trade leveraged ETFs, please do read it.
http://www.effectivevolume.com/content.php?2468-breakout-calculator_1
I will study here a comparison between going long the S&P500 by buying SPXL or shorting SPXU.
This is the $spx, with the buy range as stated on the sensitivity table shown below.
29152
29155
Below are the two patterns for SPXL and SPXU
29149
29147
Let's compare the two stats tables below: both have identical entries and stop levels. The envelope size is also identical, meaning that in the short term, both have an identical evolution. We also use 30 days as a holding period.
The results are slightly different: we have a greater probability to reach the target entry price for SPXU (30.4% instead of 27.8%), the R/R is also higher (2.71 for 2.53) and so id the average profit per trade. The major difference is in the strategy efficiency.
For SPXL, the strategy produced a 92.19% gain for the past 1000 days. This is 44.64% of the total instrument's 1000 day move. The good point is that this potential strategy had us invested for only 12.5% of the time. The rest of the time is free.
For SPXU, the strategy efficiency is much higher, because the buy and hold strategy produced very poor returns, even though the strategy using SPXU produced better returns. The main story is that you cannot be long a long leveraged ETF for an extended period. It is always better to be short on leveraged ETFs.
29148
29151
Below is the sensitivity analysis tables for both ETFs. The level by level comparison is straightforward.
Note that the stop is only 2%
29150
29154
One important note: when buying an oversold instrument, ALWAYS buy when the price clears the entry level on the way up. Never buy when the buy level is cleared on the way down.
Leveraged ETFs use options to mimic market moves. The options could be illiquid and are always victim of time decay. This means that a triple leveraged ETF cannot move exactly three times what the index is doing.
I also show in my book that it is always better to short the inverse ETF instead of buying an ETF.
If you did not read this chapter and want to trade leveraged ETFs, please do read it.
http://www.effectivevolume.com/content.php?2468-breakout-calculator_1
I will study here a comparison between going long the S&P500 by buying SPXL or shorting SPXU.
This is the $spx, with the buy range as stated on the sensitivity table shown below.
29152
29155
Below are the two patterns for SPXL and SPXU
29149
29147
Let's compare the two stats tables below: both have identical entries and stop levels. The envelope size is also identical, meaning that in the short term, both have an identical evolution. We also use 30 days as a holding period.
The results are slightly different: we have a greater probability to reach the target entry price for SPXU (30.4% instead of 27.8%), the R/R is also higher (2.71 for 2.53) and so id the average profit per trade. The major difference is in the strategy efficiency.
For SPXL, the strategy produced a 92.19% gain for the past 1000 days. This is 44.64% of the total instrument's 1000 day move. The good point is that this potential strategy had us invested for only 12.5% of the time. The rest of the time is free.
For SPXU, the strategy efficiency is much higher, because the buy and hold strategy produced very poor returns, even though the strategy using SPXU produced better returns. The main story is that you cannot be long a long leveraged ETF for an extended period. It is always better to be short on leveraged ETFs.
29148
29151
Below is the sensitivity analysis tables for both ETFs. The level by level comparison is straightforward.
Note that the stop is only 2%
29150
29154
One important note: when buying an oversold instrument, ALWAYS buy when the price clears the entry level on the way up. Never buy when the buy level is cleared on the way down.