This was posted at Rambus Forum by Big Kahuna,<\/p>\n
It is the best explanation for these things that I have heard.<\/p>\n
FWIW :
\n………………..<\/p>\n
The reason why the leverage ETFs \u2018decay\u2019 is because they are design to track 3x the Daily percentage move in the underlying and that has the following effect.<\/p>\n
Imagine an asset with a price of $100<\/p>\n
Day 1 it goes up to $125<\/p>\n
Day 2 it goes back to $100<\/p>\n
If you were invested in the asset you would be square on the trade (putting aside brokerage etc)<\/p>\n
In percentage terms we have<\/p>\n
Day 1 +25% (25\/100)<\/p>\n
Day 2 -20% (25\/125)<\/p>\n
Now the looking at the 3x Leverage ETF that tracks the Daily percentage movement and applying 3x these % moves.<\/p>\n
Assume it also has a starting price of $100 for ease of calculations. But any number works.<\/p>\n
Day 1 +75% (3*25%) = $175<\/p>\n
Day 2 -60% (3\u00d720%) of the new asset price of $175 = $70 (ie 175 \u2013 .60*175 = 175 \u2013 105 = 70)<\/p>\n
If you were invested in the 3x leverage asset you are down $30. (-30%) Versus square on the non-leveraged trade<\/p>\n
An asset that goes +10%, -7.7%, +10%, -7.7%, etc etc will be up 16% after 20 days but the 3* Leverage asset will be at 0% increase<\/p>\n
Because of this an asset could be in a slow grind bull market but the 3x product in a bear market.<\/p>\n
IMO unless you are going \u201call in\u201d (100% of your capital) it never makes sense to trade these things. You are better off putting 3x the capital in to the non-leveraged asset. And thus avoiding the \u2018decay\u2019.
\nI hope this helps.<\/p>\n","protected":false},"excerpt":{"rendered":"
This was posted at Rambus Forum by Big Kahuna, It is the best explanation for these things that I have heard. FWIW : ……………….. The reason why the leverage ETFs \u2018decay\u2019 is because they are design to track 3x the … Continue reading