I don't understand how this 1x inverted fund is supposed to work.
TSLA up 10% -> TSLQ down 10% ok....
TSLA up 50% -> TSLQ down 50% hmm
TSLA up 100% -> TSLQ down 100% wait wut? It's worth 0....
TSLA up 200% -> TSLQ down 200% WTFBBQ‽ it's worth negative money now?
I legit don't understand how this is supposed to work. Do people buying this ETF have to be accredited, margin using, level 3 options traders or do they just have this level of risk without being aware? I *almost* feel bad feel bad for these "investors"
I bought a few puts on it. What it seems to do is mirror the percentage gain each day - so if TSLA doubled in a day maybe it would go to zero.
For example, if TSLA increased 10% every day, it should decrease 10% every day. Which would mean an increasing large dollar value for each additional 10% increase in TSLA is matched by a corresponding decrease in absolute value loss for each incremental 10% decrease in TSLQ:
TSLA: 800 -> 880 -> 968 -> 1064.8 -> 1171 -> 1288
TSLQ: 40 -> 36 -> 32.8 -> 29.6 -> 26.5 -> 23.9
Trying to figure the implications for options, it seems like it would be harder to reach farther out put strikes on the down side than to reach corresponding TSLA calls on the upside because of this. Maybe the management fees balance that.
Leveraged ETF's, whether correlated or inverse, at a value of 1x, 2x, or 3x (or sometimes even higher!), are financially very complicated instruments. I don't pretend that I or anyone else really understands how they work but their track records for solvency are abysmal. Most of the time, whenever I've seen a stock have a sudden move, the leveraged ETF is wiped out and anyone who holds them loses 100% instantly. They are supposed to only be for day trading or so the story goes. If you hold one even overnight you're just gambling your "investment" goes to zero instantly.
How this works is pretty simple if you cut through all the noise.
Secret is: daily reset of the factor (mainly important for factors > 1 or < -1 as for example TSLA on LSEETF with a -3), management fees, sometimes even excluding pre/after market.
For -1 it is an easy immediate hedge by shorting TSLA behind the scenes and having management fees > fees for borrowing TSLA to short sell. As you hedge 1:1 you don't care about the market and collect fees.
For i.e. -3 the daily rebalance can save you even more: if TSLA does -10, +6 +5 then TSLA should be +0.07 ~ ±0. But the 3x leveraged did -30 +18 +18 which would still end up -2.5 thus if the stock oscillates sidewards it will eat up you money as well (proportional to the amplitude of the sideward swinging)..
Why do all this and not short the stock directly? For sometimes you have to follow a lot of rules/trading access/..
Or you sometimes just can't, because statues of the thing you have (company, fund, insurance,..) forbid shorting, options and other leveraged products.
But noone is stopping you from buying "just an ETF"
In Europe those things get hyped as "factor certificates" .. some CAN explode and yield 1000x you money with compounding interest effects (most of >5 factory do this some times). But in the long run they ALL go to 0.
Or the issuer has to pay up, declares bankruptcy and you get nothing because you waived all your rights of compensation away when entering the contract..
"Issuer risk" this is called over here.
If it would not be possible for the issuer to make an easy Profit with high probability those things would not get set up in the market
tl;dr: TSLQ should behave similar to an auto-rolling long put without the hassle to get access to options. Strongly avoid if that is not what you want
