Trade Idea

No, because of the extra fees and regulations that come along with selling short.

Well imagine you wanted the exposure of 2x long the market - financials in this case. Would shorting SKF give you a small return in excess of simply going 2x long, while having the same exact risk profile? I know its small, but is it alpha? I am thinking medium to long term, so incremental transaction fees might get absorbed.

buy GM stock and call options.

its gonna blow

short cotton short clothing

cotton acts as a hedge to the clothing

Theres little to no borrows on inverse ETFs. As mentioned, better trying out your strategy through options (if there are some)

It seems like no one in this thread has any clue how a daily inverse ETF works. There is no natural decay. It all depends on what the market does. All leveraged/inverse ETFs are required to follow an add-to-winners and cut-losers methodology or otherwise they would not be able to insure the long-term viability of the fund.

A daily inverse S&P ETF aims to follow the negative daily performance of the S&P500. So let's say we start with $100 with index at 1000. The ETF then maintains a short $-100 delta position via futures and holds the remainder in cash. Let's say market rises 50% to 150 in one day for make the effect clear. Then your short $-100 delta position generates a loss of $-50, and your fund has only $50 left. To maintain the exposure, the fund then maintains a short position of $-50 delta position. Now the market returns back to its original level of 1000 (falling 33.3%). Your fund will only have $66.67. It has massively scalped negative in futures by buying at 1500 and selling at 1000, leading to a permanent realized loss. If you do the math out, you will notice that the fund will always buy high and sell low in futures. This negative scalping of futures is paid for by the paths in which the market trends in the fund's favor and it adds to winners, thereby significantly compounding gains.

A deep understanding of this requires a deep understanding of what margin really is and how inverse performance is mathematically possible.

There is a negative decay associated with certain leveraged/inverse ETFs due to the frontrunning of rebalances that is done on an institutional level, but that is another story altogether.

Echoing a lot of the same here but a couple others....

ETFs with plain old equity underlying are generally pretty stable. There is definitely no alpha in the strategy you described.

ETFs with futures (oil) or spot (gold) tend to be less stable. Do you guys remember the DIG/DUG vs. WTI spot from awhile back? http://seekingalpha.com/article/33264-oil-etfs-on-trial

The SPDR gold etf is also absurd with the supposed shuffling of gold in and out of the HSBC (I think?) vault in London...

I think some of the more flawed etf/etns out there are the VIX tracking products. There was a rumor awhile back in the Journal section of EliteTrader about a pretty healthy arb on options on VIX futures and one of the vol-based ETNs. It was a pretty technical trade but I can't seem to find the details. Any one else read this?

Thanks for the comments. I guess my question is more theoretical than this specific idea, so let me try to outline my thoughts somewhat differently. Suppose there is a financial instrument out there that is inherently inefficient - which some seem to agree a leveraged ETF is. Or a theoretical fund that charges absurd management fees - lets say 10% on an unlevered S&P ETF for the sake of discussion. Would you be able to make money shorting the thing by "reversing" the management fee - or whatever the inefficiency of the underlying is - to make a few bucks? Lets pretend you have a need for the exposure generated by it - inverse S&P in this case - for hedging, etc.

Of course, the theoretical fund described above would not exist since no-one would buy it so you wouldn't be able to short it, but if you are convinced that a certain fund is charging more in fees than the excess returns it generates, would this work?

Also, can someone justify why the below (quoted from before) happened? Seems that here, the strategy would have worked. Am I just looking at the upside here, and had the market moved the other way (down) then shorting the short would have lost more money than longing the long?

UPRO (3x long S&P) 3/15/2010 - 55.00 3/11/2011 - 71.90 Return = 30.7%

SPXU (3x short S&P) 3/15/2010 - 31.70 3/11/2011 - 16.93 Return = -46.6%

Bump. Will pay for answers with SBs...