Its sickening to look back at the last 5 months of tape and be up only low double digits, there were many opportunities for traders and investors…it has been a ton of work to stay ahead, especially relative to how easy it would have been to be long the slippage that happens in the vehicles like FAS, FAZ, TNA and TZA.
Since we’re probably 200 points from the highs and lows of 2009, I decide to take some buying power, and set it aside to get long the slippage. I put on a trade to get leveraged short both TNA and TZA, and hedged the position against them both to the long-side.
The combo I put on is two short October call verticals with a theoretical max draw-down of $2540 per combo (although this is completely impossible if IV stays less than infinite AND TNA and TZA maintain negative correlation) with a max profit of $2960 (the net credit) (which is completely possible if given enough slip) for the complete 4 legged combo. The entire combo’s maximum liquidity requirement is $5500 to avoid a margin call, so the range of profitability is +53% and -47% of that, by October, if you take that amount as the capital requirement. Assuming TNA and TZA are fairly anti-correlated, which is a fair assumption, the actual max loss at expiry, is approximately only $1300+ what I call the bull/bear ratio imbalance offset. Since the ETFs weren’t equal in price, when I shorted them, I’m technically more of a bear than a bull. I can make or lose an amount equal to about $400, based on not having a perfect common denominator.
Meh.
So, $1700, is the REAL loss that is possible, as in, at expiry. A loss of more than that, would be just as strange as say, one of the ETF counter-party papers buyers/sellers defaulting. But, for that to happen, a ton of other shit has to break down, and money wouldn’t be safe anywhere.
I’m effectively short 2:1, TNA:TZA, from about 62.60 (including the hedge) for the TNA+TNA+TZA combo. Right now, they total about 81. So, I need them to lose about 23% of their value by October. In 5.5 months, the funds have lost about 52% of their “value”. There is a little more than 6 months until October expiry.
Yes, if we get a run in one direction the position will go against me, steering towards the $1700 (in a bull market) or $900 (in a bear market)…in the event that happens, I will be able to take profits on the hedges and roll up or down the strikes.
I got filled offering around the 35% of the bid/ask spread, almost instantaneously on IB’s smart routing system. I should have sent a higher offer, in hindsight. I’ll know for next time to go in at the midpoint. First time I ever executed such a large combo (4 legs, and lop sided ratio of 2:1).
Goes like this, 2:1 quantities, all Octobers:
BOT TNA 24 Call @ $5.16
SLD TNA 9 Call @ $13.66
BOT TZA 40 Call @ $10.92
SLD TZA 15 Call @ $23.52