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Help me understand leveraged ETFs like SPXL
Posted on 3/26/20 at 3:20 pm
Posted on 3/26/20 at 3:20 pm
A number of people on this board have recommended it and at first it seems intriguing (gaining 3x the S&P) but from everything I’m reading this is not a good long or even medium term investment and should mostly be used as a daily tool because of compounding losses and rebalancing every day. It’s also dangerous in volatile markets (which we are most certainly in at the moment) and does better with steady slow growth. I’m very new to all this, so forgive my ignorance, but why are people buying and keeping SPXL and the like?
This post was edited on 3/26/20 at 3:22 pm
2
Posted on 3/26/20 at 3:31 pm to NorthshoreTigerGirl
Interested to see comments.
Posted on 3/26/20 at 3:49 pm to NorthshoreTigerGirl
Any 3X leveraged instrument is made for day trading only due to the decay built in after it rebalances daily.
Example: SPXL $27.62 up $4.35 (after hours prices) up 15.7%
SPY $261.81 up $15.02 (after hours) up 5.7%
So you are fine for today, you made your 3X on it just like you were supposed to. But watch what happens hypothetically the next day if the trade goes against you:
Say SPY drops 5% and SPXL drops 15%. You now have to gain 30% just to get back to where ya were and it just continues to snowball on ya. So if on the next day (3rd day) SPY gets back to even right where ya started, you are down roughly 15% in SPXL. This is why volatility crushes all these leveraged ETF’s / ETN’s.
Example: SPXL $27.62 up $4.35 (after hours prices) up 15.7%
SPY $261.81 up $15.02 (after hours) up 5.7%
So you are fine for today, you made your 3X on it just like you were supposed to. But watch what happens hypothetically the next day if the trade goes against you:
Say SPY drops 5% and SPXL drops 15%. You now have to gain 30% just to get back to where ya were and it just continues to snowball on ya. So if on the next day (3rd day) SPY gets back to even right where ya started, you are down roughly 15% in SPXL. This is why volatility crushes all these leveraged ETF’s / ETN’s.
This post was edited on 3/26/20 at 3:56 pm
Posted on 3/26/20 at 4:05 pm to Hussss
Thanks for the explanation. Makes perfect sense now.
Posted on 3/26/20 at 4:09 pm to JDPndahizzy
No problem. Good luck trading.
Posted on 3/26/20 at 4:27 pm to Hussss
quote:
Any 3X leveraged instrument is made for day trading only due to the decay built in after it rebalances daily.
Right, this is what I understood from doing some research. So then what’s the best way to properly use this instrument and make a decent profit with it? Buy in the morning and sell right before close if you think it’s going to be a good day? Sit in front of your computer and stare at the market all day to decide when to move in and out? Is this even a helpful tool for someone who is your everyday investor (and it isn’t their job to have eyes on the market every day all day)?
Posted on 3/26/20 at 4:46 pm to Hussss
quote:Maybe not day trading, but very short-term. Given the volatility, UPRO has worked very well bought on dips.
Any 3X leveraged instrument is made for day trading only due to the decay built in after it rebalances daily.
But you're right. You want to unload it on a first rip basis.
Churned UPRO at least a half dozen times over the last couple of weeks at 10-25% in D2D trades. Done for now.
Strong preference for buy and hold. But if we re-test lows, it'll be back to churning. These swings have been crazy.
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