To short a long or go long a short? Thoughts, courtesy of Adam Warner at Daily Options Report
To Short Or Long
Accrued Interest takes a gander at these Leveraged ETF’s we so love.
The other day I was asked why I’m short SSO as opposed to just long SDS. The answer is that there is natural drag on leveraged ETF prices. Part of this is due to the decay factor in futures pricing. But the bigger factor is just the math of multiplication and time linked returns.
He goes thru the math of it all, which you’ll have to click over to see. All fine and good, and accurate as best I can tell. And then leaves us with this.
Now I can’t say there is a real arbitrage here, because if the market moves higher or lower decisively, that will dominate all these pretty equations. But if you are short-term trading, it seems to me you’re better off shorting the opposite ETF than going long. So I’m making a bearish play by going short SSO as opposed to owning SDS.
Look, I’ve made the case that shorting these is not as simple as it appears. It’s akin to shorting options gamma and puts you at risk of an extended move in one direction. Not saying shorting them is a bad idea, just that it’s not free cheese either, it’s a risk trade.
Accrued would seem to agree with this point. But be that as it may, I believe his advice is backwards. For short term trading, you should just buy the side in the direction you want to play. Using his example, for a short term bearish play, buy SDS, don’t short SSO. The compounding effect only kicks in when the direction changes, which is obviously more likely the longer you hold. Over time, you will be wildly dissappointed if you buy and hold. As we well know.
