You Hit It Once, Then Break Away Clean

Some guys go fishing and have fishing tales. I don’t fish. I invest. Here is my tale.

Across the field of battered stocks was EEV. EEV is an UltraShort of the Emerging Markets. I know I said I wouldn’t touch the ultra-shorts because of the counterparty risk, but I couldn’t resist. The stock had dropped $100 in just a few days. I could feel a snap back was coming.

I finally moved a baby 401K of $5K away from the fixed income plan of my former employer. By Tuesday I noticed the check had been deposited into my self-directed account at Ameritrade. I had hunting money and EEV was looking like a sweet target.

Bought 70 EEV @70.00

Then EEV exploded upwards. $80. $90. $100. Should I sell? This thing could go to $200 or back down to $70 or lower. Or the entire ETF could explode and it could go to $0. Lock in the gain and walk away.

Sold 70 EEV @101.50

Minus two commissions my baby 401K is now worth $7205. A 44% gain in 48 hours. The hunt was good.


Add yours

  1. Ha! I’m made good money in the opposing fund the last 12 months. Glad someone is catching the downside. And even more glad I sold everything a few months ago to fund the boat.

  2. I used discipline on this investment and for the moment – I am proud. EEV will most likely shoot to the moon now. 🙂

  3. Nice scalp MAS! Are you going to end up day-trading bro? 🙂

    You mentioned the counter-party risk on the 2*shorts again, so I thought I would mention a related problem …slippage!

    Particularly when there is alot of volatility, it seems the double-shorts get the “short” end of the stick. Check out this chart (SSO, SDS and S&P over the past month):^gspc#chart3:symbol=^gspc;range=1m;compare=sds+sso;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

    The S&P looks to be down about 15% and SSO (double-long) is down 30% …so far so good! But the SDS (double-short) is only up 10%!

    When the S&P rallies big, this seems to be the worst time:
    10/13 – S&P up ~5%, SDS down 30%!
    10/28 – S&P up ~5%, SDS down 27%!

    This actually exposes an interesting strategy tho …when I expect the market to finally rally I might short the double-shorts (i.e. short SDS, TWM, etc.). It’s possible to get an absolutely HUGE pay-off in one day. Hmmm…

  4. EEV opened down 11%. Whew!

  5. I’ve noticed with the 2*shorts they tend to go down disproportionatly when the market rallies. For instance SDS is barely up on a monthly chart, but SSO is down over 20%.

    There has obviously been historic volatility in the past month, but annualized that is a 240% difference …yikes! I no longer like 2*shorts because of this …in addition to counter-party risk!

    I think gaps are a problem with anything international as well. US markets tend to gap less than international equities, metals and currencies. They are being trades as we sleep, so you could wake up and have your head handed to you (on either side of the trade). 🙁

  6. Actually, it seems like there should be a hedge opportunity (possibly arbitrage?) based on the 2*short movement.

    I have yet to quite figure out the drivers though …does it only work in high volatility? During general down moves? Hmmmmm…

  7. Correlation risk is explicitly listed in the prospectus of the leveraged ETF’s. There is a great explanation of possible sources of correlation error on Geldpress:

  8. Geldpress – Good article, but I think this is actually an additional effect …probably fairly random.

    I am basically referring to the effect of interest compounding. For example, lets say the S&P drops 5% a day for 3 days.
    – SDS goes up 10% a day and $100 becomes $133.10
    – SSO goes down 10% a day and $100 becomes $72.90.

    If you went long SDS you made $33.10, but if you shorted SSO you made only $27.10. You might say that $6 isn’t a big deal, but it is about 20% of the return. And if you bought both SDS and SSO you made $6 with almost no volatility in your account.

    Anyway, the effect is real, but I’m not sure to what degree volatility, trend and other factors (like correlation risk) affect it. Needs more research…

  9. Good point Jim. Yes, there are certainly days when you can make money by owning both SDS and SSO. But that is also random. The first time the S&P drops 5% for 3 days, perhaps you do make $6 by owning both. But 2 months later with the exact same scenario you may lose $7 by owning $100 in both.

    Look at the Ultra and Inverse Dow from yesterday. Dow up 2.85%, but Ultra up only 5.19%and Inverse down 6.19%. But there is no repeatability to the logic due to random correlation errors that come from a multitude of reasons. On Monday the Dow (or S&P) could go up another 2.85% and the Dow Ultra and Inverse may both move only 4%, quite a bit shy from their stated objective of 2X.

    I’ve asked Proshares 2 questions in the past which they refuse to answer. 1) Who are your counterparties? and 2) Specifically what investment vehicles are most common to achieve your 2X performance?

    I don’t expect Direxion or Rydex to answer them either. Until they do, they just leave us all wondering and theorizing on our own explanations. But with all their problems and uncertainty, they still do make a quick and convenient to hedge (or even gamble) with your own accounts.

  10. I think there are two potential issues:

    1) Lack of symmetry between SDS and SSO.
    – Lets say $100 in SSO goes up 10%, so you can multiply $100 * 1.1 = $110.00.
    – To be symmetrical, you would expect SDS to equal $100 / 1.1, but that equals $90.91 (only about a 9% drop).
    – This eventually has to throw these indices seriously out of whack.

    2) Correlation Risk bias – The issues created by this could be completely random, but it is possible that there is a consistent bias. It would be easy enough to determine using statistical regression analysis (or econometrics), though I don’t have the time to devote at the moment.

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