Exchange traded notes: yea or nay?

[dullard]

After quickly getting 50%+ gains, three times in a row, on ZSL (double short silver), I thought about doing better. I quick search came up with DSLV (triple short silver). But it is an exchange traded note. I've never dealt with one of those before. Are there any hidden issues that I should know about before going down this even riskier avenue?

For example, ZSL has a nasty surprize of the fact that you get to pay for ProShare's tax gains (or save from their losses). It isn't much monetarilly, but it adds three forms to your taxes and is quite annoying. Is there anything similar like that with exchange traded notes?

Yes, these are risky all around. But 98% of my money is in mutual funds and I don't really want to put more in them when the market is so high. I'm willing to lose 2% on a risky gamble. Knock on wood, but I'm doing quite well off of the fear of others. I'd also like a new car, which seems doable if I win one more time.

Update: up 27% so far.

 

[Miramonti]

I had the same questions when first trading ETF's and overseas stocks but there wasn't any issues. If no one knows here I'd recommend asking on elitetrader.com [many douchebags but some very knowledgeable people.]

 

[sjwaste]

You may want to be careful shorting silver if QE3 happens. Gold jumped on the rumor that it would, as did oil. Commodities are generally thought to rise if QE3 happens, so are you intending to take the bet that QE3 doesn't happen, or are you looking to trade on silver's volatility in the meantime?

 

[dullard]

You may want to be careful shorting silver if QE3 happens. Gold jumped on the rumor that it would, as did oil. Commodities are generally thought to rise if QE3 happens, so are you intending to take the bet that QE3 doesn't happen, or are you looking to trade on silver's volatility in the meantime?

I've been trading silver simply due to its massive volitility. With a double or triple short, it is just that much more volitile. A one day bump of 90% in ZSL is not unheard of and makes it a fun gamble. I short silver since I deep down believe it is headed towards $10/ounce in the very long term rather than headed up in the very long term. Meaning I could stick out a bad bet now and probably still end up winning.

With each scare in the news, silver has jumped. But it has quickly fallen back down. The QE3 (and unlimited European bond buying) news has already caused silver to jump in the past week. Meaning, it will likely fall again. Maybe it hasn't quite reached it's peak. I haven't been perfect at timing the buying silver shorts. I usually have been 3-5 days too early on buying. But I've been close. Timing the sell date of ZSL/DSLV is easy: sell when the shares jump 50% or more in a day (or hits your price target, whichever comes first).

My bet is that silver will reach $34/ounce this week and then fall back to $28/ounce within 2 months. Of course, I don't have a crystal ball though.

 

[sjwaste]

I've been doing the same on paper with oil and gold. If you're looking for leverage, you could also trade options on SLV. I've been paper trading options just to learn the past couple of weeks, and the swings you can get on commodities for relatively few dollars and limited risk are pretty incredible. By limited risk, I mean just the dollars invested on the option contracts, not the actual trading risk which is high.

If you know you're going to see volatility, there are options strategies to take advantage of that. I'm just not far enough along to know what they are

 

[Miramonti]

I've been doing the same on paper with oil and gold. If you're looking for leverage, you could also trade options on SLV. I've been paper trading options just to learn the past couple of weeks, and the swings you can get on commodities for relatively few dollars and limited risk are pretty incredible. By limited risk, I mean just the dollars invested on the option contracts, not the actual trading risk which is high.

If you know you're going to see volatility, there are options strategies to take advantage of that. I'm just not far enough along to know what they are

I hope you've found a good book on options strategies and risks. Just watching certain markets won't be enough because you'll be limited to those behaviors only.

 

[dullard]

Well I'm in. 750 shares of DSLV at $19.95/share.

 

[Crusty]

AFAIK these are the major differences

• ETN gains are taxed as capital gains at your closing transaction because they are treated as prepaid contracts, instead of how an ETF will require you to pay capital gains as they re-balance and manage their underlying positions.
• There are no tracking errors, by buying an ETN you are guaranteed it will track the underlying index minus fees.

The two of them are semi-related, due to the way ETNs are packaged as structured products.

 

[sciencewhiz]

DSLV has a daily reset period, so it will do a good job returning 3x inverse returns over a day, but will have significant tracking error over a longer period of time.

http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/P119778

 

[dullard]

DSLV has a daily reset period, so it will do a good job returning 3x inverse returns over a day, but will have significant tracking error over a longer period of time.

http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/P119778

I think you have it reversed. ZSL had the 2x inverse returns over a day but the long term returns were far from 2x tracking (could be better or worse depending on the speed of the change). DSLV, I think, is supposed to be closer to a true long-term 3x inverse track. Of course, nothing is perfect. For example, VelocityShares could go bankrupt and I lose my money regardless of what silver does.

Regardless, either way, they are a good method to earn or lose money quickly.

 

[sciencewhiz]

I think you have it reversed. ZSL had the 2x inverse returns over a day but the long term returns were far from 2x tracking (could be better or worse depending on the speed of the change). DSLV, I think, is supposed to be closer to a true long-term 3x inverse track. Of course, nothing is perfect. For example, VelocityShares could go bankrupt and I lose my money regardless of what silver does.

Regardless, either way, they are a good method to earn or lose money quickly.

The following statements are in the DSLV prospectus:

The ETNs are intended to be daily trading tools for sophisticated investors to manage daily trading risks. They are designed to achieve their stated
investment objectives on a daily basis, but their performance over different periods of time can differ significantly from their stated daily objectives.

The ETNs are designed to reflect a leveraged long or leveraged inverse exposure, as applicable, to the performance of the applicable Index on a
daily basis, but their returns over different periods of time can, and most likely will, differ significantly from two times or three times, as applicable,
the return on a direct long or inverse, as applicable, investment in the applicable Index. The ETNs are very sensitive to changes in the level of the
applicable Index, and returns on the ETNs may be negatively impacted in complex ways by the volatility of the applicable Index on a daily or
intraday basis.

It is possible that you will suffer significant losses in the
ETNs even if the long-term performance of the applicable Index is positive, in the case of the
Leveraged Long ETNs, or negative, in the case of the Leveraged Inverse ETNs.

 

[dullard]

The following statements are in the DSLV prospectus:

Yes, I've read that. Doesn't change my statement. DSLV is still has been far closer (in its short life) tracking long-term than ZSL regardless of how many documents you post. And since I'm used to ZSL and the tracking error, it doesn't affect my decision.

 

[dullard]

Go silver go!

 

[sjwaste]

So what's your strategy for trading silver? I really don't know how to take advantage of the volatility.

 

[sjwaste]

I hope you've found a good book on options strategies and risks. Just watching certain markets won't be enough because you'll be limited to those behaviors only.

Nope, I've learned the hard way! :biggrin:

There's a good reason I used some play money. I took a bath on USO calls.

 

[BrokenVisage]

 

[dullard]

So what's your strategy for trading silver? I really don't know how to take advantage of the volatility.

Sell high and buy low. Honestly that is about it.

For the last year and a half, I've sold silver when it is near $35/ounce and bought when it is near $30/ounce (give or take a couple dollars). While that is just a $5 change (14.3%), it doesn't seem like much. But I go with 2x and now 3x bets. So instead of a 14% change, it becomes a 29% change or a 43% change. But, my numbers aren't hard and fast rules. Going from $35 to $27 instead makes it a 46% change or 69% change depending on if you go with a 2x or a 3x fund.

I have three strategies (you could certainly argue against them as they are just my personal opinions):
1) This is just my play money. I keep most money in mutual funds that are buy and hold. So if I lose it all, I don't lose much. These funds aren't for the typical buyer due to their massive volitility.

2) I sell high and buy low instead of buying low and selling high. Why? Because I fundamentally think silver is going to go back to its historically typical price under $10/ounce (see bottom graph for historical values: http://silverprice.org/silver-price-history.html)

Thus, I personally get comfort in the idea that if I have a short position (selling high before buying low) that in the long run I won't lose my money. Sure, in the short term, I can and have been be down 20% in a few days after making my purchase. But that is just a short term loss and I can overlook it with my true belief that silver will come back down. Thus, I short from ~$35 to ~$30 (ZSL and now DSLV) instead of going long from $30 to $35 (AGQ and USLV). True, I could win on both swing directions. But I don't have the stomach to be double or tripple long in a fund that is going the opposite direction than I think it will go.

3) I balance greed and gain. For example, I've sold out at a 50% gain rather than waiting for the 60% gain. Luckilly, most of the silver moves have been in the tens of percent per day range, so I don't have to keep decidin "should I sell with 25%, 30%, 35%, or 40% etc". I've had a 90% gain in just over a day for example. I sell when I get my big gain and let others take the risk for the remainders.

That said, the gain may be fleeting. The 90% gain period lasted for about 20 minutes. I had a smart phone (bought for this very purpose), set an alarm to notify me, and sold during work hours. I couldn't do that on most jobs, but mine is flexible at the moment and I just work a half hour longer that day. You could use limit orders instead.

Also, at least the ProShares fund doesn't track long term very well. Don't think that with silver at $32.70/ounce today and ZSL at $44.50/share that in a few months that ZSL will also be at $44.50/share even if silver comes back to $32.70/ounce. In other words, this isn't something for the long term capital gains. Take the profit and run, even if you pay 33% tax (state + federal).

 

[dullard]

Halfway to my goal. Up 27%. One more big day and I may just take my profits and run.