Leveraged ETF’s

Inverse and Leveraged ETF’s

I, like many others, have been expecting a major correction (crash) in the market for some time. As I explained earlier the only thing holding the market up is the Federal Reserve’s continuing of QE 3 which is pumping money into the market.

I trade five different accounts. Two are trading accounts that I can go long or short in. The other three are an IRA and two 401k’s. In those I can’t go short because retirement accounts can have no margin. Although I think this gives the professional traders an unfair advantage, 97 percent of nonprofessional traders lose money so this protects them to some degree. Along with allowing you to short the market, margin also allows you to lose money twice as fast.

In January of 2015 I bought UWTI long in an effort capitalize on the huge drop in oil. UWTI is a leveraged ETH that attempts to capture three times the daily movement of the S&P GSCI Crude Oil Index.

A brilliant trade. Or so I thought at the time. My first buy was at three bucks when WTI crude was at 46.00. My second buy was at two bucks when crude was at 44.00. At this point I knew there was something wrong with my thesis but I still had no clue.

The original premise of the trade was that UWTI was around 11.50 when WTI was at 75.00 a barrel and that was my target. If WTI only got back to 60/65 dollars a barrel I would sell UWTI at 8/9 bucks a share and cry all the way the bank.

A week or so into this trade WTI had moved up to 52.00 a barrel and UWTI had only risen to 4.32. Several weeks’ later oil bottomed at 44.00 a barrel and UWTI bottomed at 1.79. Terrifying. I bought more on the bounce at 2.00 whether I was terrified or not. Crude oil eventually moved up in the low 60’s and UWTI got back to 4.28. A double top. I sold at 3.90 and was still clueless.

In my quest to find a vehicle to go short in my retirement accounts I very fortunately ran across an article written for Morningstar by Paul Juctice. He explains that the on a 1 dollar uptick on a 3x leveraged fund is 3 dollars in a vehicle priced at 100 bucks. That same one dollar move back down to 100.00 is 1.03. That’s 101.00 times .03. The math works against every time.

 http://news.morningstar.com/articlenet/article.aspx?id=272055

Read the article if you are considering trading leveraged ETF’s.

Dave Cappaert

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