Recently I have been looking at matched pairs leveraged ETFs with the intent of finding arbitrage opportunities for easy profit. If would seem that this has already been discussed in the following archived thread:
It would seem that the strategy of shorting a matched pair of leveraged ETFs would between May 31, 2009 and present would have resulted in losses (with the exception of energy and 30 year treasury ETFs). In most cases the gain on shorting the bear ETF was wiped out by the loss on shorting the bull ETF.
Another strategy advanced in the archived thread was to open a covered call position on both the bull and the bear ETF. While this strategy would have worked during that same period it may not work under different market conditions.
While it is clear that playing with these ETFs could result in large losses due to the level or risk involved, I was hoping that anyone who has done this could provide more recent data points.
True but there is some advantage to being a small individual trader. It is much easier to buy or sell 10 option contracts than 10,000 option contracts, especially if they are thinly traded.
Much like AOR or other strategies on this forum, if there is a profitable strategy other people who think they have better things to do with their time can't be bothered to find it leaving an opportunity for us to profit.
Even if the arb does close in a few months, perhaps we can make money from this now.
tazzy531 said: By the time you've done the analysis, backtested, etc, some statistical arbitrage quant at a hedge fund has made the trade 10 times over.What makes you think he's not from Lake Woebegone?
dshibb
Senior Member - 2K
posted: Oct. 27, 2009 @ 3:27p
Okay we tried to establish on the last thread that this isn't a true arb play. Technically it is if you have lots of excess capital and lots of time, but the actual arb will be a really low return over that amount of time.
What kind of play is it then? Its a bet on a volatility vs. movement. When you have large swings and little movement, shorting the opposing positions is a good investment. If its small swings and a lot of movement its a very bad play to short the opposing. On the flip side what happens when you go long the opposing? If there are small swings and a lot of movement its a very good play. If its large swings and a little movement is a very bad play. Whether you short opposing or go long opposing is a bet on what scenario is going to play out.
And since recent movement and volatility aren't a predictor of future movement and volatility, you are stuck making the educated guess of which pair to do, the same in any investment.
Last time I looked at it the rebalancing is what ate up the slim profit margin.
dshibb
Senior Member - 2K
posted: Oct. 28, 2009 @ 9:08a
That too, but if volatility was really, really high with no movement it would outperform the rebalancing costs under a double short and if volatility was close to 0 and the movement was strong the double long would outperform the costs. If it isn't enough of either of those than yeah you earn a profit or much of one.
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