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The financial talking heads and pundits have been saying for some time now that the is destined to take another nosedive in the near future. Time will tell whether their short-term predictions are correct or not, but the is cyclical, so there will always be ups and downs, which causes problems for investors using the strategy.
One of the most common complaints against the strategy is the exposure when s make severe downward movements. However, investors can circumvent the problems with in a bear market by entering against short and ultra short Exchange Traded Funds (ETFs).
Inverse or short ETFs are traded on exchanges like stocks and are designed to perform opposite or inverse to the long version of the ETF. Short ETFs operate by selling stocks short and trading derivatives such as futures contracts.
One downside to short and ultra short ETFs is the increased expense ratio compared to other ETFs. The SPDR S&P 500 ETF () for example has a net expense ration of 0. 095% whereas the ProShares UltraShort Real Estate ETF () has a net expense ratio of 0. 95% - a 10x difference. In real dollars, $10, 000 for example, the expense ratio for the SPY ETF represents $9. 50 per year versus $95. 00 per year for the SRS ETF.
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might simply consider the $95. 00 as a cost of doing business when the weather forecast for the is bleak. [buy betnovate online
] When the bears are roaring, maybe its worth it to pay more for the higher cost of the lemons required for making lemonade.
» return goal > 2% / month
» works in any market
As an illustration, a position published by 's Palladium newsletter will be analyzed.
In October of 2008, the outlook for the was very bleak and entering positions for stocks of any type or entering a long position was not an attractive . However entering for a short or inverse position was attractive.
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On 10/20/2008, the Palladium newsletter published a trade for the ProShares Ultra Short Real Estate ETF buy betnovate online
(). To enter the position, SRS was purchased for $131. 01 and a (SRSKC) was sold for $25. 6. The had November expiration and a strike price of $120. The SRS trade had a potential return of 13. 8% and downside protection of 19. 5%.
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The recovered somewhat after entry buy betnovate online
, but then continued its decline. The real estate sector also recovered after entry of the position and then continued its decline. Even with the retrace in the price of SRS, the for SRS remained in the profitable region and at November expiration on 11/21/2008 the price of SRS was $216. 67. The SRS ETF was subsequently called away and a profit of 13. 8% was made on the position.
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A graph of the SRS ETF over the time period for holding the trade is shown below:
As can be seen, the price movement of SRS moved counter or opposite the movement of S&P 500 ETF ().
A long position in SRS would have resulted in a whopping return of 65% over the time period, however on 11/4/2008 the price of SRS was at $110. 00 representing a loss of -16%.
Even though the trade generated less return, it also presented less pain as the position was in the profitable region during the entire time while a long position in SRS would have been in the red for several days after entering the position.
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[tags] ETF, derivatives, futures contracts, ultra short ETF, Palladium, newsletter, SRS, ProShares UltraShort Real Estate ETF, SPY, S&P Depositary Receipts Trust ETF [/tags] ?? 2008-2016 Legit Express Chemist.