Here is a perfect example showing how 3x leveraged ETF funds can lose value over a short period of time while the underlying investment is deep in our favor by 5% and should have our ETF in our favor by 15%). But instead we are under water by a few percent still…
This is a prime example of why I don’t trade 3x ETFs that often. And when you actually run the numbers on how much leverage you actually get with 3x ETFs its actually the same or less than if you just bought a single ETF with the same amount of capital and margin… 3X ETFs require you to have 90% margin, while a single ETF only requires you 30%. It’s a little complicated to crunch the numbers and explain but know that 3x ETFs are nothing special when you do the math for both long term and short term trades.
For example, if you wanted to buy $1000 worth of a 3x ETF, the margin requirements on these fund are 90% meaning you must have $900 in your MARGIN account to trade this position. But if you wanted to trade say a single ETF where the margin is only say 30% for a non leverage fund, you can technically trade the same position size with the same amount of money WITHOUT the 3x leveraged fund price decay we all know is terrible in these highly leveraged funds.
So if you wanted a position to match the power of the $1000 3x leveraged ETF position but using the single ETF, you would only need to buy $3000 worth of the single ETF, but because its only 30% margin requirement. This may be confusing, the only point I’m trying to make here is that you can get almost the same trade using a single ETF simply because of the margin requirements between the two types of ETF funds. Most individuals do not realize the crazy margin required for 3x ETFs and its likely the reason most traders get margin calls with trading these funds.
Long story short, if today’s price action is a reversal day it will only take another big down day for us to be deep in the money on our inverse ETFs.
