Friday, February 5, 2010
Markets continue to drop
DOW dropped 286 points and S&P 500 lost another 34 points on Thursday. TUR has been stopped out on the Traders Pick portfolio based on the daily closing price dropped below the MA-39 moving average. I initiated an inverse SH (Short S&P500 ProShares) purchase with 50% of the portfolio and tried to catch the near term down trend market.
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I'd be interested in your thoughts of inverse ETFs versus puts. I used some inverse, mostly double inverse, ETFs in 2008 and decided buying far in-the-money puts provided much better results.
ReplyDeleteThe double inverse ETFs clearly only work when your short-term timing is impeccable. Check out the performance of SRS versus IYR. If in early 2007 I had bought JAN 2009 LEAP puts instead of SRS, my results at the end of 2008 would have been far superior.
But not having any leverage makes the simple inverse ETFs less useful to my way of planning, which includes keeping some long-term positions in income stocks.
Right now, I have Dec 2010 $130 outs on the S&P in an IRA, they have a minimum of a premium and about 4:1 leverage.
Bob,
ReplyDeleteBoth inverse ETFs and Put options have a similar effect that both instruments can be profited when the underline equity is heading down. Options have time and intrinsic values but inverse ETFs do not.
Agreed with you that Put options can be highly leveraged with large percentage of profit potential using pre-determined risk amount comparing with just simple inverse ETFs.
All 2X and 3X ETFs are tracked daily which means it resets its funds every day comparing with its simple ETF counterpart. It is not ideal for near-term or long-term holding except it is ideal for active traders whose holding period is just a day or two, or even hours.
I am not against any of these two methods as long as you know both instruments can be used in different situations and objectives. As with simple inverse ETFs, it can be hold with a down trend market just like the simple ETFs in a up market with no leverage. However, it may be ideal for some larger accounts that the goal is to make a few percentage points or so in a down market while waiting for the market's reversal to the up side.
Ocean