Short ETF multiday hold

Discussion in 'ETFs' started by Kicking, Sep 25, 2009.

  1. Is there a way to estimate the "decay" of a short ETF when you hold it for several days without the market moving down or holding it through a bounce ?
  2. Chagi


    My take on this is that the decay depends on the degree of leverage for the ETF that you are referring to....the larger the leverage, the greater the potential decay. For example, I have started to build a short position (with tight stops) in Horizon's new single inverse ETFs (Canadian product), as the potential decay is very low.

    My suggestion regarding estimating decay would be to build an Excel spreadsheet, and start by populating it with some random "worst case" moves for your desired time period. For example, you could look at the historical volatility of the desired instrument, then plug in the swings over, say, 15 days, e.g. +5% one day, -5% the next day, +5% the next day, and so on. You can then calculate the percentage difference between your start and end values, assuming that there is no change in the underlying (i.e. if this just chops up and down by significant amounts each day, how much will decay hurt me).

    You could also get more sophisticated by using random numbers, but it is probably still worthwhile to estimate some variants of a worst case scenario. Just make sure that you go far enough back in time, because volatility has been relatively low over the past few months...

    Decay is actually one of the main reasons that I am experimenting with the single inverse products, because I think that volatility could increase substantially over the next couple of months. The 2x and 3x stuff is sexier, but only if you have good timing and excellent risk control.