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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: Peter V who wrote (166918)11/24/2008 5:47:07 PM
From: The ReaperRead Replies (2) of 306849
 
PV, I've been thinking about your experience with FXP and how it doesn't correlate inversely with the FXI like it should. I've looked at other 2x inverse funds and over a period of time of more than say a week, none of them appear to hold their value. I have a real time example from today....

IYR closed Friday at 27.39 and was +3.87 or 14.1% to close at 31.28 today. SRS, the 2x inverse closed Friday at 216.67 and was -73.87 or 34.0% and closed at 142.80. If IYR was to exactly reverse tomorrow and return to 27.39 (a loss of 12.4%), SRS would increase by 24.8% to 178.21. You would have a loss of 38 pts. in SRS when the underlying entity made an EXACT roundtrip in 2 days. Now today SRS fell more than 2x the percentage IYR was up. Let's compare apples to apples and assume SRS fell exactly 2x the amount IYR was up.

SRS would have closed at 155 today (-28.2%). Tomorrow SRS would increase by 24.8% to 193, still a shrinkage of 23 pts. The conclusion to be taken away from this is do not use the 2x inverse ETF's for anything other than day trading or you will experience shrinkage. The other thing to be taken away from this is that you can probably sell naked calls on the 2x inverse ETF's and get a little more advantage than buying calls on the underlying entity or buying the entity itself.
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