20 DMF Intraday Updates

[Billy]

Due to Pascal being away from his desk today, there will be no intraday 20 DMF updates.
But you may check in the last hour of trading if ever he is back and able to make an update before the close.
We are sorry for the inconvenience.
Billy

[Billy]

Pascal is back and the intraday 20 dmf has just been updated.
Very disappointing money flow today.
Billy

[davidallison@gmail.com]

Billy, Just wondering if the disappointing money flow might be due to the Columbus holiday in the US and the Bond market being closed … many traders taking their cue from the Bond market and are perhaps waiting to see how it reacts to the latest US economic news and the news coming out of Europe? Dave

[Billy]

Billy, Just wondering if the disappointing money flow might be due to the Columbus holiday in the US and the Bond market being closed … many traders taking their cue from the Bond market and are perhaps waiting to see how it reacts to the latest US economic news and the news coming out of Europe? Dave

Dave,

Impossible to know. But relative to the strong price advance yesterday, the 20 dmf was really weak, large players were not participating.
And you'll see that the IWM robot has a big surprise setting this morning!
Billy

[davidallison@gmail.com]

Hi Pascal,

The IWM robot sold on the Tuesday morning after the Columbus Day holiday, I’m sure partly due to the weak money flow. IMHO I’m thinking this weak money flow was due in part to the bond market being closed that Monday. If somehow Columbus Day didn’t happen, (had we gone from Friday directly to Tuesday) do you think the IWM robot would have stayed in the trade? If it stayed in, is there a chance it would have held on? Perhaps this question might be impossible to answer. A guess would be fine.

My second question pertains to option trades for TZA/TNA (anyone?)

As Billy pointed out there is a well documented decay effect with leveraged funds. For example a short on TZA started 4 Jan 2010 and covered this past Friday would have returned approximately 79%. The IWM return for the same period is 12.6% and a TNA return for the same period is 9.5%.

Another decay effect is the time premium decay that options loose to expiration. The highest percentage of the time premium decay is lost in the final three months to expiration.

For a long trade, and with this in mind, is anyone shorting naked calls on TZA? We would have these two factors working in our favour and the above returns could be significantly enhanced. Risk factors of shorting naked calls aside, I have a feeling that a regular monthly short on TZA calls (provided the 20 dmf was in the buy mode) makes sense. If anyone is doing this, would you mind commenting?

Thanks,

Dave

[senco]

Time decay of leveraged ETFs depends on volatility and the price "path". In brief but strong directional moves, or in a gradual non-volatile price change over time - one may see the inverse effect. Shorting inverse ETFs (instead of buying a long ETF) can work to your advantage when your trades are in the right direction, but losses could be larger if trade direction is wrong.

As for writing naked calls: "Risk factors of shorting naked calls aside... makes sense" . A strategy of writing options does not make sense if one puts aside risk factors; the whole idea of the trade is exchanging risk with option premium. Systematic options writing on an index might yield many small gains, with occasional big losses that could easily wipe the gains (imagine that naked call trade if the market were to move in the other direction). For such a strategy to work one needs to very well understand the risks as well as rewards, and there is no free money here. Writing options on a leveraged or inverse ETF combines two leveraged tools with non-trivial behaviour - a very risky proposition if one does not understand them both very well.