I hear references to how people view trading TNA to be extremely bad and dangerous. I’ve heard references to people who, after swearing off those tools, have managed to re-build their portfolios. I would love to hear from those people, because there’s something here I clearly don’t see…
Now, let’s get a few “givens” out of the way first:
a) yes, I have absolutely no idea what “TNA” actually is. It is an artificial market instrument, that’s as far as I’ll go – as to WHAT it actually is, what it contains, no freaking clue. Who knows, maybe the danger lies in there, if so, please let me know. But I have to admit, seeing people trade Chinese stocks which can be (and have been) stopped half way through a day, never to re-open again, I don’t consider TNA to be as dangerous…
b) TNA is extremely volatile, yes, BUT that can be managed with position size. 1200 shares of $IWM or 400 shares of $TNA will move, more or less, by the same amount (plus/minus, since the leveraged ETFs’ daily movements are goals and approximations, not guarantees). Yet I don’t hear people complaining about traders buying and selling $IWM…
c) Decay. Yes, all leveraged ETFs (well, ETFs in general, I THINK, but leveraged ones in particular) will suffer from a decay. For the purposes of this write up, I use the word “decay” to mean everything other than the movement of the underlying index which causes the value of it to change. This doesn’t really hit you on a day to day basis, but it can become significant if, for whatever reason, you choose to hold TNA for an extended period of time (say weeks). I think the most likely scenario here is a trade which went against you, and is so in the red that it becomes a hopeful investment (sound familiar, anyone ) ? Well, let’s take a look at a practical example of this in action:
The Russell 2000 index opened today (I was writing this on Thur, May 19th) at pretty much the same identical level which was the HOD on Feb 18th (the day which will live in infamy forever, for me!!!!). Comparing the corresponding values of TNA on those two days, we see that TNA has lost 1.65% of it’s value, in 3 months of pretty volatile trading. 1.65%. In dollar terms, it means $1.50/share over the course of 3 months. Now, what I’m about to say will surely be heresy to a lot of traders, and I apologize for that in advanced, but to ME, a loss of $1.5 on TNA over 3 months is NOTHING. We trade this “stock” for its freakish volatility, for its big daily and intra-daily ranges. We trade it to get quick $3-$5 in days and get out. The idea that we won’t trade it, because IF we happen to hold it through 3 months of extremely volatile market swings, it’ll lose 1.65% of its original value to decay, is a joke. Never mind that this is something we’d really never do in the first place. TNA trades are scalps or tactical swings, from over sold conditions. To use its long term decay as an argument for not trading it in the short term is like saying that a particular SUV won’t hold up in a race across the Sahara, so therefore you shouldn’t buy it to drive your kids to school every day. The first part, while factually true, doesn’t have anything to do with the second part.
Please note that the decay on inverse instruments is much higher. Using the same timeframe described above, TZA lost 6.95% and TWM lost 3.45%. Holding TNA as an investment for weeks, in a hope it’ll come back is feasible (note I said feasible, as in MATHEMATICALLY FEASIBLE, not advisable or desirable or smart). Holding an inverse into a long rally (think Sept ’10 onwards) is NOT feasible. After several weeks, you’d need a very sizable collapse, to market levels far below where you bought the inverse, to hope to just break even.
So, as long as position size is managed in recognition of TNA’s volatility, and stops respected, and the instrument used only for relatively speaking short trades, I honestly don’t see the difference between trading IT and a proportionally largest position of the non-leveraged equivalent.
Please explain that difference to me…
Thanks!
By the way, Uncle Russell seems to be shitting the bed these days, is in a firm down trend, and the recent bounce from O/S conditions seems to have been just a short term one. The futures seem to indicate yet another move down. So, for swings, I’ll wait for the Russell to make a new lower low, which will most likely correspond with 3-4 down days in a row and another PPT Oversold. Those sounds like high prob TNA swing entry conditions! See you there:
Omen, where’s your exegesis-seminal-blog in connection with IWM / Russel trading? You seem like an expert in this. Do you trade the ETF or futures? Both? Etc., whatever’s related. Merci.
omen – It’s the SSDD syndrome.
1. People don’t understand the levered ETF’s or the commodity ETN’s.
2. They don’t read the prospectus.
3. They overtrade.
4. They don’t pay attention to their positions.
5. They don’t understand what 2X or 3X DAILY movement means.
6. They don’t understand the consequences of DAILY compounding.
I’m sure there’s more. It’s not worth the effort. I’ve made good returns trading and hedging using the levered products including TNA, TZA, FAZ, FAS, DXD, QLD, QID, TBT, TLT, SDS, SSO, and of course the king of maligned products, VXX.
I use them as part of an overall strategy to both hedge and increase leverage. I don’t just start shooting from the hip. It’s like anything involving leverage or going short. You need relatively good timing compared to the size of the expected move, and you need relatively good risk management.
Well said Omen. I honestly think a lot of commodity related stocks have more “decay” than leveraged products as they often need exponentially higher commodity prices to keep a rally going. Just like you don’t know what goes into TNA, I don’t think very many people knew what went into silver miners in the recent run up. Just look at a chart of EXK. On March 7th it hits a high of 10.33 on a day when SLV hit a high of 35.78. On March 24th EXK didn’t really get close to breaking through prior resistance, on a day when SLV hit 37.26. It took all the way until April 5th, a day when SLV hit a high of 38.34 to clear prior resistance. What followed was a run in SLV from 39-48.00 that had NO effect on the share price. Now obviously there is more to it than just the price of the underlying commodity, but this kind of action frustrated a LOT of people and would definitely be what I would categorize as “decay.”
I’ve had times when 100% of my portfolio was in leveraged products and times when 100% of my portfolio was in PM’s. I slept a lot better at night with the leveraged ETF’s.
thanks, guys! @Yogi, that’s a GREAT list of things people need to know/pay attention to if they want to get into this type of 3x trading – thanks!
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