A New Short Position

I added a new position this week, a small short position in $NAIL the Direxion Daily Homebuilders & Suppliers Bull 3X ETF.  That is, a leveraged ETF that seeks to triple the Daily performance of the homebuilders.index.  

I don't have any special insight into the homebuilders, but I think I have a pretty good idea of the long term performance of these specialty leveraged ETFs, which is lousy.  This one has only been in existence for a few months and is already down by 30% or so. 

It's pretty volatile and rarely traded.  The most difficult thing about it is finding somewhere you can short it, and I was lucky enough to find enough for a small short position.  

As always, the key to winning as a short with these funds it to hold the position other an extended period.  Buying and selling in a matter of days doesn't play to it's weakness as a daily rebalanced fund.  

Best of luck trading.  

I need Non-Correlated Assets

Whoo boy, what a day in the market, huh?  Tough for a long like me.  Yes, I am short ETFs, but they are inverse ETFs, so on a bummer of a day like this, I get slammed, and since they are leveraged, I really get slammed.  I did some trading to minimize the damage, but still some pretty steep losses.  

The concept was to have some funds that were not correlated with each other.  That is, I had a Russia, China, small caps, financials, biotech, oil and some others, so on other days, some were up and some were down.  Not today, everything got crushed, and my ETFs spiked.  Cost me a lot of money.

The point is, on a day like this, virtually everything is correlated.  So I either need to be more nimble, or buy some things that are inversely correlated, so that for sure I goes up while the other goes down.  I've tried that, and it works with these ETFs, but slowly.  I'll consider it again.

I sold a bunch of stuff, , including my $NUGT position.  Yyou can compare to a prior post to see the differences: The ETF Short List is a lot shorter tonight. I did keep the $UVXY, which got really hammered.  I saw it was the 11th highest spike in the $VIX since they have been keeping records.

	Close	Initial Short	Gain (Loss)	Percent
BIS	30.08	29.75	(0.33)	-1.1%
TZA	9.80	9.90	0.10	1.0%
VIXM	54.86	54.17	(0.69)	-1.3%
FAZ	11.76	11.26	(0.50)	-4.4%
UVXY	44.50	40.68	(3.82)	-9.4%

I covered $XIV Today

I covered my short on $XIV today, the Inverse VIX product.  Just about breakeven, made a little that went to commissions.

I think the market has slipped enough for now.  We'll see. The lousy market hurt many of my other positions, so a net loss for the day.

	Close	Initial Short	Gain (Loss)	Percent
NUGT	8.77	10.47	1.70	16.2%
BIS	27.83	29.75	1.92	6.5%
TZA	9.05	9.90	0.85	8.6%
VIXM	52.45	54.17	1.72	3.2%
RUSS	33.67	30.40	(3.27)	-10.7%
CORN	24.05	22.68	(1.37)	-6.1%
FAZ	11.12	11.26	0.14	1.2%
UVXY	33.49	40.68	7.19	17.7%
FXP	29.06	27.58	(1.48)	-5.4%
SCO	56.75	55.93	(0.82)	-1.5%

A Simple Explanation of Contango

Some of the ETFs and ETNs I follow tend to decline over time, and the explanation is something called contango.  It’s very impactful in $UVXY,  but exists in any product that uses futures.

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You can look up the definition of contango in a lot of places.  Investopedia defines it as "When a market is "in contango" when the delivery price of a particular futures contract has to converge downward to meet the futures price." and that’s a good explanation, but if you don’t trade futures, it may still be hard to understand how it impacts these ETFs so severely. 

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For an analogy, imagine that you are given $100,000 in a bank account.  As part of that gift you are required to buy a new car every month, and to trade in the previous one.  It’s pretty common knowledge that a new car will lose a $1,000 in value when you drive it off the lot.  It doesn’t matter if you use the car or not.

We will use that knowledge to see what happens to your bank account over time. Every time each month when you trade in the car, you receive $1,000 less than its cost.  Therefore, each month the value of the car goes down by $1,000.  If the price of the new car is different than the last one, the bank account balance may go up or down, but eventually, the loss of value will catch up to your bank account. 

If you buy a car for $20,000, your balance goes down to $80,000.  Next month, you’ll trade that one in for $19,000.  If you buy a car for $15,000, you’ll see a bump to $84,000, but that’s only temporary.  The following month you’ll only get $14,000 for the trade and if you buy a car at the original price of $20,000, your account will drop to $78,000.

This is how contango works.  There is always an ultimate decline in value because of the rolling of the futures to another month.  Sometimes it may be delayed, but it is going to happen. 

The opposite of contango is backwardation (I wonder if someone made this name up) and it can occur, but not very often or for very long.  This is why I sell these products short.   On a long term basis, time is on my side. 

A rough day in the market, as the dropping Dow caused my short positions to lose me money.  It’s only one day. 

NUGT	9.03	10.47	1.44	13.8%
BIS	27.61	29.75	2.14	7.2%
TZA	9.05	9.90	0.85	8.6%
VIXM	52.48	54.17	1.69	3.1%
RUSS	33.12	30.40	(2.72)	-8.9%
CORN	23.36	22.68	(0.68)	-3.0%
FAZ	10.90	11.26	0.36	3.2%
UVXY	33.00	40.68	7.68	18.9%
FXP	28.14	27.58	(0.56)	-2.0%
XIV	48.78	48.70	(0.08)	-0.2%
SCO	55.57	55.93	0.36	0.6%

$UVXY You Can Buy, You Can Short, but Never Do This

$UVXY is the Proshares Ultra VIX short term Futures ETF.  Per Yahoo! Finance The Ultra Fund seeks daily results that match (before fees and expenses) two times (2x) the daily performance of the S&P 500 VIX Short-Term Futures Index.

A couple of important items there.  Ultra means 2X.  So this will be twice as volatile as it's cousin, the $VXX, which is plenty volatile.  The part is the intention to deliver DAILY results.  One can question whether this happens, but there is no question that on anything past one day, you will see a wide departure from the VIX.

The VIX is a specialized product that attempts to judge the volatility in the market.  I could go into a long winded explanation of how each of these products works, but for now, it's enough to know that when the VIX works in the opposite of the stock market (specifically the SPX) and that the market goes up, the VIX goes down.

When the VIX shoot up, $UVXY will shoot up, twice as fast.  When the VIX goes down, $UVXY craters.  When nothing much happens, $UVXY will fall from contango, which is essentially the decay of futures contracts on the VIX.

As I said in the title, you can buy $UVXY if the $VIX is rising in the short term.  You can short it if the $VIX is falling or if it not moving.  What you shouldn't ever do is buy and hold $UVXY.  It will slowly decay because of the contango.

$UVXY has only been in existence since October 2011,  In that time the split adjusted price has gone from $395,000 to $31.

Read that again.  I'm not kidding.

Never hold it more than a day or two.  I really don't even recommend buying it, but I know some people will.  Good luck.

A good day on the market for me.  I shorted $XIV as a hedge, but it wasn't necessary to today.

	Close	Initial Short	Gain (Loss)	Percent
NUGT	9.00	10.47	1.47	14.0%
BIS	26.77	29.75	2.98	10.0%
TZA	8.82	9.90	1.08	10.9%
VIXM	52.32	54.17	1.85	3.4%
RUSS	30.64	30.40	(0.24)	-0.8%
CORN	23.43	22.68	(0.75)	-3.3%
FAZ	10.65	11.26	0.61	5.4%
UVXY	31.81	40.68	8.87	21.8%
FXP	28.22	27.58	(0.64)	-2.3%
XIV	49.68	48.70	(0.98)	-2.0%
SCO	54.13	55.93	1.80	3.2%

I shorted more $VIXM on Friday

Sorry, a little behind in posting.  I shorted more of the mid-term VIX product.  I really think this is a good move.  These tend to drop more slowly but more consistently than the short term ETNs like $VXX or $UVXY.  They also don't spike as high when the market turns down. Does require a longer term outlook, but it's worth it.

Overall, a really good day for my short Bear Positions.  Also $NUGT dropped like a rock along with gold. This is a scary time, as big moves tend to lead to reversals.  We'll see, but I don't intend to cover anything.

	Close	Initial Short	Gain (Loss)	Percent
NUGT	8.96	10.47	1.51	14.4%
BIS	26.81	29.75	2.94	9.9%
TZA	8.89	9.90	1.01	10.2%
VIXM	52.72	54.17	1.45	2.7%
RUSS	30.49	30.40	(0.09)	-0.3%
CORN	23.04	22.68	(0.36)	-1.6%
FAZ	10.73	11.26	0.53	4.7%
UVXY	33.56	40.68	7.12	17.5%
FXP	29.64	27.58	(2.06)	-7.5%
SCO	55.75	55.93	0.18	0.3%

A very good day on the market

No changes to my positions. No price update tonight.  My bear ETFs all dropped with the market advance. Got hurt by $NUGT, but overall a very good day.