# Inverse ETF



## arc (May 19, 2012)

Does anyone have any recommendations for inverse ETFs? I have a CIBC account and would like to purchase some (TSX traded). Seems like a good play on the Fiscal cliff news. Any suggestions?

Hoping to hold until late Dec or so and using it to hedge my equity portfolio. 

Thanks


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## HaroldCrump (Jun 10, 2009)

Here:
http://etf.stock-encyclopedia.com/category/etfs-listed-in-canada.html

Anything with the







symbol is an inverse ETF
*2X*







is double inverse.


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## bayview (Nov 6, 2011)

Not a bad alternative for shorting & / hedging. But the embedded derivatives and potential counterparty risks bother me.

Need to read the fine print carefully.


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## Doug2000 (Apr 6, 2011)

A friend from work always told me that leveraged or inverse ETF's should never be held for longer that 3 days because of the underlying hedging and derivatives. A guest on Marketcall also made the same comment.

My friend makes alot of cash trading FAS FAZ 3x leveraged financial ETF's.


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## andrewf (Mar 1, 2010)

Look into buying puts on equity funds instead.


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## arc (May 19, 2012)

Thanks for the great replies. I am looking into HIU Thoughts? https://www.google.ca/finance?client=ob&q=TSE:HIU
http://www.horizonsetfs.com/pub/en/etfs/?etf=HIU&tab=overview

Thanks


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## Snuff_the_Rooster (Oct 26, 2012)

Here' the fact sheet for that etf.

http://jovian.transmissionmedia.ca/pdf/betapro/HIU_en.pdf

It says right in there that they can't even guarantee the proper return for even one day. Those things are just garbage. The levered ones are even worse - or should I say better, if you know how to play them.

If it were me i'd get off the crack-pipe of inverse or levered etfs and start hedging what I own, directly. There's nothing worse than thinking you're hedged and then when you need it most you find out the hedge is falling apart. As mentioned above, the longer you hold that thing the worse it's likely to get. I've not done a study on this particular etf but there's no doubt it's no different than the multitude that we have studied.

How many stocks do you own anyway? What are you trying to hedge specifically?


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## arc (May 19, 2012)

Snuff_the_Rooster said:


> Here' the fact sheet for that etf.
> 
> http://jovian.transmissionmedia.ca/pdf/betapro/HIU_en.pdf
> 
> ...


I was hoping to profit from a broad market downturn. The ones I am worried about are:
NA.TO - 300 shares - covered call @76 Nov
BNS.TO - 300 shares 
SU.TO - 400 shares 
G.TO -350 shares 
SLW.TO -300 shares - 1 covered call @42 Mar 13
ABX.TO -100 shares 
LNV.TO 200 shares<- no options available
POT.TO 100 shares

I hear that inverse index mutual funds maybe a safer play?


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## Snuff_the_Rooster (Oct 26, 2012)

Hey arc, i didn't mean for you to tell me how many shares you have lol. I mean if you want to that's fine but I would be hesitant to give that type of info since we can work out a concept without knowing exact amounts. Only you need know that info. I also have no idea how much cash you have in percentage of the account.

You first said you wanted a hedge but now you're saying you want to profit from a pullback, IE net short?

Let's forget what I think about the market right now and focus on what you're thinking. All I can say is if i were you and wanted to hedge out my portfolio completely I would do it with a series of options on the securities that would not hinder the upside a whole lot yet protect a whole lot of downside.

It may be more work than what you're looking for but since you're wanting to hold whatever you hedge with for a while (a month or more?) then I think you'll not be happy with using an inverse etf. They just all-around suck, plus going the options route, set up properly you can have a whole lot of the pie which-ever way we end up rolling.

Of course I would not ever suggest using options if you aren't familiar with them, so again I leave that up to you.

The problem I see most people have is that they're 5 steps behind the ball and chasing a hedge. Generally not the ideal position to be in.

I will admit that I hedge pretty much every bet from the outset and have some well defined methods so it should be understood that that is where my head is at all the time so these occasional market-tank fears etc are really never a concern.

I might suggest that may be an area you want to look at in the future. IE Using option first as a safety of capital idea, then along with that in mind, creatively to allow for the time when your thinking turns out to be completely wrong.

I'll just tell you what we will do with most of these inverse and double (or triple) inverse funds. Since they're such broken vehicles the only direction we trade these things are short - with a paired trade. There's more to it that just that of course, but they're so bad we actually have defined methods that pretty much guarantee a return (yes I did just used that "G" word). The only reason we don't use them more are that they're a horrible use of capital, but it still works very well.


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## dogcom (May 23, 2009)

I would much rather be long something then short something. There is almost always something that does well when the market goes down. So maybe a short term US dollar bond fund could be a ticket as the market usually declines when the US dollar is going up for example.


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## Snuff_the_Rooster (Oct 26, 2012)

Just as an additional note, ARC. 

One point I'd like people to remember is that less fancy is likely best. I think it's acceptable for a fund or individual that has a lot of stock or enough of it that it approximates say the SPX, for those types to hedge a bet by simply going in and shorting the appropriate amount of SP Futures.

For the smaller guy what I worry about the most is that I see them making not as well correlated hedges which turn into issues for them. I have actually seen people losing on both sides of the trade as their correlation came part at the worst time. I agree with dogcom in general. (See above). The problem with that is it's not a guaranteed event but even worse is you cannot define as well what the offset might need to be. It just adds in a lot of unnecessary complexity when you have something much more easily defined in options against the actual positions you have.

Just something to think about. Personally I never hedge a dingy with a kayak. I hedge a kayak with options against that same kayak.

In general people over-estimate the cost of hedges with options but it's mainly because they don't know how to use them as efficiently as they could. This is why they fall prey to the idea that they would rather be a seller of options in order to capture the time decay and would never think of paying some amount of time for safety. I guess that's another story though, haha.


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## arc (May 19, 2012)

Thanks for the replies so it sounds like* buying put options on SPX is a much better option than inverse ETFs?* Could probably make a good return in 1-1.5 months.

*As a side note, I've been working to set up collars on most of the equities I own but the puts have been so darn expensive lately


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## Snuff_the_Rooster (Oct 26, 2012)

i would buy puts on the stock i own before i would touch spx options.

the spx comment was for big players who need a hedge on a pile of stocks that as a whole closely resemble the SPX. You're not that guy -and neither am I. Plus it provides the best correlated trade you can get.

I can do far better using options on the underlying myself. It allows as much creativity as I want - or not. 

keep it simple man.


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## Snuff_the_Rooster (Oct 26, 2012)

Here's an actual position we have on a long stock with Dec options against it.









I'll come back and explain it in words once I find out if I can upload a tiny 32k file (for pete's sake!)

hahaha, yep tiny and ugly but you can see it.

the solid line is us right now @ the vertical black line. The dotted line is us @ Dec expiration. We have a longer dated put on which ensure we can't lose our capital and in fact ensure we can only take gains.

The Dec position as you can see protects a fair percent of downside where we an actually make money over the next month even if the stock drops a bit. If we're wrong and we don't drop, do we care?

From that chart it is a big fat 'no'. We'll just make money anyway.

You could set this up on all your stuff that has options available.

As a general comment, I can't ever guarantee we'll make money on stocks but this stuff is way easier than most people make it. It just boggles my mind really.

If you can set up something like the pic if you want to, then why the hell would you screw around trying to make some convoluted play that likely won't work anyway? :smilet-digitalpoint


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## arc (May 19, 2012)

Thanks Snuff_the_Rooster, I really appreciated your help  


Snuff_the_Rooster said:


> Here's an actual position we have on a long stock with Dec options against it.
> 
> View attachment 182
> 
> ...


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## Snuff_the_Rooster (Oct 26, 2012)

Hi Arc, just thought i'd update for no other reason than to show a concept.

The options that allowed for the above look we just took off. We still have the long dated puts to ensure gains only. The set we took off gained while we dropped in price as the market flushes out. We took what amounted to a (quasi)risk-free trade to the downside which we just realized. Our plan is to hold the position if we drop since we can't lose a lot from here and will only walk with a gain. If we move back up we will re-apply the same position and start all over again.

No-where along the way are we making predictions on what will happen. We just trade what we're given to the best of our ability and we don't worry about it.

the quasi-free trade netted just over 1% of cost of shares and the duration was about 2-3 weeks.


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## arc (May 19, 2012)

Thanks again Snuff_the_Rooster, what software or websites do you use to set up your strategies and Profit & Loss Graphs?

thanks


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## Snuff_the_Rooster (Oct 26, 2012)

People with IB may recognize that thumb-nail. It's part of TWS platform called Risk Navigator. It monitors anything you have real-time by security and dates as required with options. You can use it to set up scenario's as well if you're interested in seeing what different spreads etc may look like. Only necessary when getting a couple spreads on top of each other or adding off-sided ratioed dog-legs by the cow against the fence post with the ice cream stand, positions. :smilet-digitalpoint

Err, never mind, that's only funny to me and is not translatable unless we get a few beers down range. Then you'll pi-s-$ yourself laughing.

Seriously though, I could do this in my sleep with no graphs but I suggest people get an option charting package and learn to use it. Most brokers I would guess have something similar. I hear there's an excel spreadsheet kicking around that does a decent job too, that someone has built.

If anyone here knows of it they could tell you. If not I'll find out and get back to you.

I only have one strategy with long stock positions (multi-legged but all the same game) and I just do it over and over when the market fits my parameters (all technical based) which just started happening over the past week. From there my dog could run it pretty much.

To give you an idea about what we're doing with that position so you can see a bit more of our mindset here let me give you some stats on it. We've taken monthly income out of it since Sept which has amounted to about 5% plus we got dividends of another 2% plus we're sitting on some capital gains of close to 10%. We put this trade on around May?

The gains aren't huge by any means but they are completely locked in and we just pound it every month with no regard for risk because we don't HAVE any and we don't ADD any.

I'm not going to argue with people about this next point because I don't honestly care what they think, but the 17% running is quite ac'cretive since we run a hedged book we can be fairly aggressive with leverage if we feel the need to. I don't do a lot of stock I always say because it's true, but this one position is about 20% of our account and at one point was double that. I pared it back to get all the risk out knowing I could pound it for months.

We just do this over and over. It usually works but sometimes it doesn't and when it doesn't, it doesn't take out multiple winners as most do! That is key to good system. The discretion in the mix is deciding how bullish I am on the market and then scale the trades appropriately. People that watch me work tell me what they learned most is that you don't have to trade and make money everyday. Fully 75%? of my time could be just as easily spent sleeping. There's just not a lot to do most of the time. Today wasn't one of those days! Started @ 4:30AM (futures trading), went back to bed, then got up ready to go by the bell @9:30.

The whole idea is hedged bets because we don't know jack and we don't want to lose a lot of capital.


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## lonewolf (Jun 12, 2012)

Hey, Snuff_the_Rooster

How do you decide weather to hedge by just buying a put or to just put less money on the table & buy a deep in the money call with little or no premium but consists of mostly intrinsic value & exit it well before exploration? If the market moves in your direction the option basicaly has no choice but to increase in value & if it moves against you most often the premium will expand if there is enough time left in the option.

Do you some how base it on your statistic of the research i.e., based on largest drawdown, average drawdown, average gain, percentage of wins or what ever statistics ? 

Thanks


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