Another 3x Bearish ETF Appears In Our Top-10
Happy New Year, Fellow Slopers.
I just saw a 3x bearish ETF (TZA) pop-up among the ten highest-ranking names on Portfolio Armor‘s daily ranking of optionable stocks and exchange-traded products by potential return net of hedging cost. Usually, it’s just stocks in that top-10, but the last time an ETP appeared there it was another bearish ETF, YANG. I posted about that here in November (“A Hedged Bet Against China“), and since then, YANG has gone on a decent run. Maybe something similar will happen with TZA? Just in case it goes pear-shaped, though, I’ve posted a hedge for it below. First, a quick look at how YANG has done since our November post on it.
Background On How We Calculate Our Ranking
Every trading day, Portfolio Armor ranks all of the hedgeable stocks, ETFs, and other exchange-traded products in the U.S. by its estimate of their potential return over the next six months, based on an analysis of price history and option market sentiment. Then it subtracts hedging costs, and ranks them all by potential return net of hedging costs, or net potential return. It’s a method of security selection we backtested 25,412 times over an 11-year time period during which it generated solid returns, on average.
On Tueday, the highest-ranked ETF, and the 8th-ranked security overall, was the Direxion Daily FTSE Small Cap 3X Shares ETF (TZA), a triple-levered bet against small caps, with a potential return of 9% over the next six months.
A Hedge For TZA
As of Tuesday’s close, you had a shot of capturing that potential return, while limiting your downside risk to 9% – and getting paid to hedge – by using the optimal collar below:
As you can see in the top part of the optimal collar above, the cost of the put leg on 1000 shares of TZA was $6,850, or 12.05% of position value. But as you can see in the bottom part of the collar below, the income from selling the call leg of the collar was $9,000, or 15.83% of position value.
So the net cost of the collar was negative: you would have gotten paid $2,150, or 3.78% of position value to open this collar. Note that this cost was calculated conservatively, using the ask price of the puts and the bid price of the calls; in practice, you can often buy puts for less than the ask (i.e., at some price between the bid and the ask), and sell calls for more than the bid (again, at some price between the bid and the ask). So, in practice, you would have likely collected more than $620 to open this hedge. The images above are from the Portfolio Armor iOS app.
