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February 16th, 2012 at 11:23 am
From yesterday's post:
Newbie: Very interesting discussion of the tracking accuracy of TNA/TZA. I read on SA that the ultra PAIRS do decay, some by a fabulous amount. I ran a spreadsheet on several of the pairs, going back as far as they existed – which surprised me in that many of the ultras are quite new and lack extensive history. It is almost impossible to go short (or stay short) on any of the 3x issues, even the ones with significant daily volume, even though that's what I modeled on the spreadsheet. And yes, the decay of the PAIR is stunning. Over a year or so, one side will be down 10%, while the other is down 50%.
I decided to try playing both sides of pairs short by selling calls. Unfortunately, after a couple of months of nice success, I ran into this buzzsaw of a rally that took TQQQ and EDC to fantastic gains. Although the mates (SQQQ and EDZ) declined nicely, I began to notice the pair was no longer decaying. In the case of TQQQ and SQQQ, the pair actually has a net GAIN over the last 5 months. In the back test of this pair, TQQQ was up 44% while SQQQ was down 70%, quite a large net loss for the pair. And that was only about the average of the pairs I studied. Some were even more extreme.
I never paid any attention to the tracking accuracy of the 3x ETF. I will post on this again after some additional experience unless I go broke in the meantime….