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ProShares UltraPro Short S&P500 Message Board

  • thecolddrop thecolddrop Jun 3, 2013 4:40 PM Flag

    Why not hold SPXU?

    Why so many disclaimers that you should only purchase this etf for day trading, and that holding long-term is a bad idea? In some cases it can make sense to hold.
    Consider an investor with $10,000 who thinks the market is overvalued and will fall 10% within the next two years. She can either buy SPXU at a 1% management fee ($201 compounded for 2 years + $15 broker fees), or she can buy puts on 500 different stocks that will give her 3X short leverage on the whole market (broker fees to buy and exercise 500 options is likely more than the $10,000 principal).
    If you have done your dd and are confident that the market will correct in 2 years, why not hold on to SPXU?

    Sentiment: Buy

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    • "She can either buy SPXU at a 1% management fee ($201 compounded for 2 years + $15 broker fees), or she can buy puts on 500 different stocks that will give her 3X short leverage on the whole market (broker fees to buy and exercise 500 options is likely more than the $10,000 principal)."

      If your investor is shorting/hedging the SPX she would not buy 500 options. She would buy a put on the index or short 1 or more S&P futures contracts.

      If the market went straight down day after day SPXU would be a great vehicle to buy and hold. But that isn't how the market works. Unless you catch the market reasonably close to a major top buying and holding will get you eaten up by volatility decay. With volatility decay, up and down movements that leave the market unchanged leave SPXU at a lower level. You can search for articles on it but it can be illustrated easily.

      Take today's closing prices:

      SPX = 1631.38, SPXU = 23.79.

      Suppose tomorrow the SPX rallies 1% to 1647.69. SPXU will fall 3% to 23.0763.

      Now suppose the SPX falls back to 1631.38. While it rose 1% the move back is only a decline of 0.99% and SPXU will rise 2.97% to 23.76167.

      If the SPX went down 1% first, SPXU would rise from 23.79 to 24.5037. The rally back to 1631.38 would be a 1.01% move up and SPXU would fall to 23.7612.

      So in both cases although the SPX winds up unchanged SPXU declines about 0.12%. Over time this adds up and this is assuming perfect tracking on SPXU's part, which it doesn't do. Add in expenses and this just eats away at indicative value (IV). If the market is going to decline 10% very soon it doesn't matter much for someone who just bought. But folks expected that at 1500 and I'm sure someone is holding from that level or lower. At the 1687 top the market was 12.47% higher than that so a 10% correction off the top doesn't get them even and that is before all the decay and expense erosion of the fund's IV.

      The VIX long ETFs get crushed by contango and are even worse.

 
SPXU
45.27-0.75(-1.63%)Aug 19 4:00 PMEDT

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