Mark Holstius Elite    Posts: 744 Joined: 10/11/2012 Location: Sleepy Hollow, IL  User Profile | While it would be nice to have Nirvana tag each ETF with its leverage and do the math for various specific brokers, I don’t expect them to devote the resources to accomplish that – so I’m looking for a reasonable alternative to use in the meantime to minimize the chance of margin calls using leveraged ETFs. My proposal has been to put the leveraged ETFs into separate Portfolios (+/-2X, +/-3X) with unique Max % Inv restrictions for each, but keep them in the same Account. (see previous posts about req’d Maint Margin & specific values) By separating out the leveraged ETFs into Portfolios nested in an Account with the necessary restrictions on each, the Account will always have access to all the equity for trading, but never more than that (i.e. you can’t “over boost” it by changing the Max % Inv in it’s Portfolios). So, I don’t feel it’s necessary to put these leveraged portfolios into their own accounts. The -3X 90% overnight margin requirement means that you’re limited to having $111,111 in 3X positions in a $100,000 2X margin account to still meet the margin requirements. If your -3X positions totaled $150,000, you’d need $135,000 of equity. Likewise, if your original trade was OK the 1st day but your account equity goes down, you could still get a margin call. To demonstrate how the Max % restriction works, I’ll run OV with some sample portfolios I built that show the results for the 2 months from 2/1/16 – present: In the example below I’ve only used -3X ETFs in the portfolio. There are 2 tables showing the trades starting 2/1/16. The left table shows all the trades with the Portfolio Max % Invested set at 100%. The right table shows all the trades with the Portfolio Max % Invested set at 51% (with all trades similar to the left aligned). I’ve highlighted 3 groups of trade days where there was a large amount of equity in -3X ETFs on the same day (2/3/16=yellow, 2/18/16=orange, and 3/3/16=green which has some overlap with orange). Notice that on the left side we’d have far too much allotted in -3X ETFs to still meet the 90% margin requirement, but by setting Max % Inv at 51% on the right side, OV limits the trades to a sum of ~100% of equity, leaving us with the required 90% margin: A similar example using +3X (requiring 75% Maint Margin) yielded one day that was brought back to the necessary level when using a 62% Max % Invested limit (2/18/16): Interestingly, if I put them together and add in a -2X portfolio set at 78% Max % Invested there are enough trades of various forms that the restrictions only have an effect on the number of -3X trades on 2/2/16: In summary, these restrictions only come into effect on days when you have a large number of trades of the particular type (+/-3X, etc.) along with enough free equity to fund the trades – i.e. having 50%+ of your equity in leveraged ETFs. But even though they may not happen often, they can give you overly optimistic results in an OV backtest - so unrestricted backtests with leveraged ETFs could be suspect. It’s been interesting investigating this, and I’d like to share a few thoughts; Leveraged ETFs are great for day trading, and I have friends who’ve done well trading 2 & 3X ETFs in OV - but we need to be aware that there’s potential for problems if held overnight with their Maintenance Margin and daily “reset”. (See attached SEC article) Also, if there’s a large move in the markets and we’re on the wrong side we can get burned quickly. (duh?) Given today’s environment (think flash crash, terrorist attack on the financial markets, etc.) it might it be prudent to use leverage more often to the short / inverse side than long. I don’t remember many “flash up” moves… Last, I plan to consider manually setting a wide stop in case I'm unable to monitor the trade due to an outage or something. (Yes, my AWS account went down and I got no notice because the Trade Processor and its ability to notify me went down with it) I’m not an expert – just observing…. BTW, the Elite Trader Portfolio I published is < 1/3 leveraged (only at 2X) - and those ETFs are weighted to the inverse side: 95 1X vs 44 2X 5 +2X vs 39 -2X Sorry if I rambled too long - best of luck in your trading, Mark [Edited by Mark Holstius on 3/28/2016 7:32 PM]  Attached file : -3X trades.jpg (1323KB - 673 downloads) Attached file : +3X trades.jpg (1046KB - 671 downloads) Attached file : +3X -3X -2X trades.jpg (2080KB - 682 downloads) Attached file : SEC Article On Leveraged ETFs.pdf (163KB - 400 downloads) |
