Wednesday, April 22, 2009

Lessons From Today's Trades......

Ok now that there is a temporary reprieve from the madness.....

Just for clarification, and I'm sure regular followers understand this, the goal with the BGZ trade is for a longer than "normal" holding period compared to the usual trades I post. This is because it appears the market is in the process of forming an intermediate term top, so that getting bearish at these levels offers a good reward on risk for the inverse trades. I have only done this type of trade a few times on the blog (Jan and Feb this year as it looked like things were topping - and this time). Normally I would have suggested an exit Monday before the close, but since I think the S&P has a real good shot at dropping below 800 in the next week or so, I want to try to hold a little longer.

So the choices (in my mind) were to keep the stop on BGZ at 47.20 (Friday's low in BGZ) and risk a nearly 3% loss, and then having potentially the same type of situation on whether to re-enter or not, OR to just create a break-even trade and then again decide on re-entering if stopped out. I know I don't psychologically like taking a loss when a trade was nicely positive, so I chose the breakeven route for the blog.

From my experience with this type of situation, I think that getting stopped out breakeven and re-entering can actually and TRULY be better in similar situations because you could potentially re-enter with a bigger position size since you now have a well-defined stop point which is higher than the original. So, now if the trade continues in your favor, you could end up making more money than the initial trade because of your better risk/reward, hence bigger position size.

Also, since BGZ went straight up even after my post, I again changed the re-entry price to 48.73 which seems to be a fair price based on the comments.

Looking ahead to tomorrow, if you got stopped out and didn't re-enter before the close then either go with a market order in the morning or use a limit order of 50.81 (today's BGZ high) in case of a significant gap. In this case, if using a market order, I would say only use about 90% of the normal amount devoted to a trade in case of a gap getting you in too far from an ideal price and you have a larger risk per share.



  1. I have a prospectus for the ProShares funds and have a few questions. There is not a real good correlation between the the Ultra- funds vs the Short- funds with regard to return. In other words, if the objectives are met equally in these funds, the inverse funds would have a return equal to the inverse of the corresponding Ultra- funds. Some of them are close, but there is still a spread. This raises some questions for me. Are there traders who are closer to the funds who have an advantage over you and me? Is there a way to follow the net asset value intra-day as compared to the market value, either real time, or after the fact?

  2. Other than going through the Q&A's, etc. on, I couldn't answer any of that for you.

    The only thing I would think is that these ultra funds typically use futures contracts and equity swaps to achieve the stated performance goal.

    Futures contracts would have to be rolled over to the next month at every expiration. The futures contracts at different expirations have different "carrying charges." So I don't know if there are differences in which contracts, etc. are held short versus long in the inverse or standard ETF's or if that would make a difference.

    Also, the funds like this use equity swaps (which honestly I don't know much about). But I think the idea is that a fund like this is not going to actually buy and sell all these contracts, etc to represent the change in market value of the fund. I think that would create huge tax consequences. My understanding is that the equity swaps are not taxable but are some type of agreement of a fund to pay a backer/bank the performance of the index at certain intervals while the backer is responsbile for continuously "lending" the money to reflect the fund market value.

    So I think it ends up being an even swap but I think that the bank gets some type of money market rate on the cash/loan so that they have some profit in the transaction. So the fund does have an expense in that area that they would probably pass on to the investor in some way.

    So I don't know if that helps at all, but really I don't think I can answer your other questions any better than you could with a little effort.