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Shorting leveraged ETFs - a good strategy?
#1

Shorting leveraged ETFs - a good strategy?

I've been thinking about shorting leveraged ETFs. They pretty much all lose money long term, so you're pretty much guaranteed to make money eventually as long as you don't get stopped out in the short term.

One ETF I've been thinking about shorting is VXX - this thing is a colossal piece of crap, just look at a long term chart of it compared with underlying volatility index it purports to track. I wouldn't short it now, because there could be a selloff in the markets soon, but the next time there's a selloff and the volatility spikes, wouldn't shorting this thing be a smart move? Is there really a reason not to do it? It seems like it would basically be free money.

Some people here seem to be fairly knowledgeable about trading, maybe someone could offer some ideas.
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#2

Shorting leveraged ETFs - a good strategy?

So when you short it, when do you decide to cover if it goes up? Shorting is risky because it potentially has unlimited losses.
If you short, make sure your can answer that question, if you don't have a solid exit strategy, don't do it.
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#3

Shorting leveraged ETFs - a good strategy?

Quote: (01-12-2011 03:15 AM)tjuan Wrote:  

So when you short it, when do you decide to cover if it goes up? Shorting is risky because it potentially has unlimited losses.
Well, not really in this case, because VXX is going to go down long term. You can't say that with certainty about a stock. Even if volatility goes up and stays up after you buy it, you will eventually make money. Shorting it when the volatility goes above 45 seems like a no-brainer. Unless I'm missing something. I was hoping someone who knows more about how these ETFs work could comment.
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#4

Shorting leveraged ETFs - a good strategy?

Quote: (01-12-2011 02:39 AM)Irminsul Wrote:  

I've been thinking about shorting leveraged ETFs. They pretty much all lose money long term, so you're pretty much guaranteed to make money eventually as long as you don't get stopped out in the short term.

One ETF I've been thinking about shorting is VXX - this thing is a colossal piece of crap, just look at a long term chart of it compared with underlying volatility index it purports to track. I wouldn't short it now, because there could be a selloff in the markets soon, but the next time there's a selloff and the volatility spikes, wouldn't shorting this thing be a smart move? Is there really a reason not to do it? It seems like it would basically be free money.

Some people here seem to be fairly knowledgeable about trading, maybe someone could offer some ideas.

In theory shorting leveraged ETFs seems great - they inevitably lose value over time due to "slippage". The problem is that all the hedge funds have the same exact idea and these leveraged ETFs are Hard-To-Borrow if not impossible.

Good luck trying to locate shares to short.

And also because of the leverage you could take some big losses if the market moves hard against you. Sure you might eventually make money, but that will seem really far away when you are staring at a 200% loss (you can lose more money than you put in) because the leveraged ETF you shorted doubled in a month.

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#5

Shorting leveraged ETFs - a good strategy?

Quote: (01-13-2011 04:20 AM)phoenix abroad Wrote:  

Quote: (01-12-2011 02:39 AM)Irminsul Wrote:  

I've been thinking about shorting leveraged ETFs. They pretty much all lose money long term, so you're pretty much guaranteed to make money eventually as long as you don't get stopped out in the short term.

One ETF I've been thinking about shorting is VXX - this thing is a colossal piece of crap, just look at a long term chart of it compared with underlying volatility index it purports to track. I wouldn't short it now, because there could be a selloff in the markets soon, but the next time there's a selloff and the volatility spikes, wouldn't shorting this thing be a smart move? Is there really a reason not to do it? It seems like it would basically be free money.

Some people here seem to be fairly knowledgeable about trading, maybe someone could offer some ideas.

In theory shorting leveraged ETFs seems great - they inevitably lose value over time due to "slippage". The problem is that all the hedge funds have the same exact idea and these leveraged ETFs are Hard-To-Borrow if not impossible.

Good luck trying to locate shares to short.

And also because of the leverage you could take some big losses if the market moves hard against you. Sure you might eventually make money, but that will seem really far away when you are staring at a 200% loss (you can lose more money than you put in) because the leveraged ETF you shorted doubled in a month.

Do you mean shorting the VIX index through an ETF? Personally dude I wouldn't do that now, I have a feeling the other shoe is going to drop with this European debt crisis (i.e. Spain) or some big US state will have a fiscal crisis and VIX could spike. I would short commodities if I could since I think China will slow down their market and reduce demand for steel, copper, etc. vs. forecast but I am feeling risk averse these days.
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#6

Shorting leveraged ETFs - a good strategy?

why short? almost all ETF have a counterpart that do the exact same price movement, inversely, so you can buy instead.

also ETFs are "products" that can have diffirent rules, for example the "betapros" wich are the most traded for natural ressources on the TSX, reset their overall % gain each morning so even if the chart is huge it doesnt mean the possible gains are there. Also there is a big probability of having splits / reverse-splits wich of course undermine the progress of price. Finally you have the "contango" effect wich adds another layer of complexity.

so you see why I never traded ETFs and when I wanted something leveraged I just played penny stocks.
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#7

Shorting leveraged ETFs - a good strategy?

L'Etranger and VVP: look at a chart of the VXX ETF over the past couple of years and you'll see why I'm thinking about shorting it. It just keeps going down.

I agree that now is not the time to short it because the VIX index is low and the market would seem due for a correction as it has been going straight up for a while now, but the next time the market tanks and the volatility goes up it seems like it would be a no-brainer to go short. It seems like it's basically impossible to lose money because VXX will always go down. Even if the volatility keeps going up after you short VXX and stays high for a while, you will eventually make money.
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#8

Shorting leveraged ETFs - a good strategy?

Hello traders,
There are several reason mentioned here against shorting VXX - phoenix wrote about operational difficulty of locating shares to short, and vendi offering his opinion on short volatility risk from the point of fundamentals.

I want to point you to two excellent blog posts on technical risks of short VXX strategy -

1 http://onlyvix.blogspot.com/2010/07/shor...pears.html
2 http://marketsci.wordpress.com/2011/02/2...th-of-vxx/

Both posts discuss risks from statistical perspective, something that probably should be your starting point. Shorting VXX and actively managing risk can be difficult for a retail investor. I don't really know anything about it, because I trade as a professional.

L'Étranger offered to use the inverse ETFs for short exposure to VXX. I don't know what's available in the Canadian markets, but in the US there are two funds that offer "short VXX" : XXV and IVO. XIV is a daily inverse of VXX. Also you may look into XVIX which is a long-short vol strategy on the term structure of VIX futures.

Know your risks before you trade, and good luck!
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#9

Shorting leveraged ETFs - a good strategy?

Here's a good explanation of why the VXX sucks.

http://adventuresincapitalism.com/post/2...-Fail.aspx

However, smart investors like Felix Zulauf expect a lot of volatility in 2011.

http://fundmanagernews.com/zulauf

In short, I'd be careful with this strategy and make sure you short it after a big spike.
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#10

Shorting leveraged ETFs - a good strategy?

Thank you Lief, excellent links!
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