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Old 05-19-2009, 05:15 PM   Nav to Top  #1
Miles
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Default Tips: Trading FAS/FAZ

Tips: Trading FAS/FAZ

Alright I made and lost a decent amount playing FAS/FAZ this year so figured I would throw up what I have learned about them, and hopefully get some discussion going.

Warning: Triple leveraged ETFs like FAS/FAZ are seriously volatile, and I consider them the crack cocaine of the stock market. Expect heavy losses or heavy gains very quickly. You've been warned.

FAS/FAZ are 3x leveraged ETFs that track the Russell 1000 Financial Services (RGS) Index. ^RIFIN

Note: You can download the prospectus for both FAS/FAZ via Derexion, and I would go over it some before buying.

Leverage and Decay

From the prospectus:

The correlations sought by the Bull Funds and the Bear Funds are generally a multiple of the returns of the target index or benchmark. The benchmark for the Direxion Daily Large Cap Bull 3X Shares is 300% of the daily price performance of the Russell 1000 Index, while the benchmark for the Direxion Daily Large Cap Bear 3X Shares is 300% of the inverse, or opposite, of the daily price performance of the Russell 1000 Index.

So I hope you see why this is dangerous now? Due to the triple leveraging of swings in the RIFIN.X, FAS/FAZ can take some violent runs causing this stock to decay over time. For this reason it is almost always advisable not to hold either of these over night.

Take a look at the example scenario below to get an idea of the decay principle.



So holding these over time is going to be a losing proposition by their very nature. Please make sure you understand that before trading either of them.

How do I play FAS/FAZ?

Most of my success has been playing news but this also created my biggest losses. The bottom line is that both of these ETFs are very unpredictable. Most people put FAS/FAZ akin to playing some roulette at a casino and I tend to agree with them. Compounded negative returns are bad mmm'kay. Having said that if you can call the trend, 30% gains in a day are also common.

I wish I could help more but what I can tell you is that you will need to be intimate with the large financial institutions and their charts. Below is an image of my QuoteTracker desktop to give you an idea what I am tracking when I trade FAS/FAZ (click for larger).



By keeping an eye on WFC, JPM, GS, BAC, C, and others you can pick better entry points or spot a trend, breakout, or channel easier. For example, I like to watch for breakouts in sector leader GS or MS to form a strategy. Spend time on the RIFIN.X chart for most of your day trading plays.

*Some tickers in the RIFIN.X: JPM, BAC, C, WFC, USB, UBS, MS, GS, BK, TRV, V, AXP, BBT.

Sources:
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Last edited by Miles; 05-19-2009 at 05:41 PM..
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Old 05-19-2009, 06:06 PM   Nav to Top  #2
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Nice write up Miles!

I like the crack cocaine analogy. I got burned by FAZ a couple of times, and learned my lesson for less than $1000.

I simply don't play FAS/FAZ anymore, I did not like having something I wasn't willing to hold over a weekend!!

Cheers!
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Old 05-19-2009, 08:42 PM   Nav to Top  #3
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Wow, what a great post! I would give you rep, but I apparently give you too much already. Coincidentally, I bought some FAZ yesterday close to its low point. Had no idea what it was really. I just knew that when the market is down FAZ goes up, and I expect the market to go down soon. Now, I can do some chart analysis! Thanks!
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Old 05-19-2009, 09:38 PM   Nav to Top  #4
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Interesting topic!

I was trying to figure how the percentage changes in the indexes are related. Today Russell 1000 was down 2.6%. FAS down 5.8%, FAZ up 5.2%. Could not find any relationship there except that FAZ and FAS goes in opposite direction.
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Old 05-19-2009, 10:33 PM   Nav to Top  #5
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Great write up! been there got burned but did make a few $$ once! LOL here's a pic on how the two track the Rifin........ good luck to all....as Miles said "You have been warned!" also I have read many times don't ever hold over night??

2009-05-19_222635.jpg
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Old 05-20-2009, 02:17 AM   Nav to Top  #6
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You can also play options on FAS and FAZ. For example, today the June $10 calls were trading at around $1.20 when FAS was about $9.70. This limits your downside risk.
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Old 05-21-2009, 12:35 AM   Nav to Top  #7
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Originally Posted by KaPow View Post
You can also play options on FAS and FAZ. For example, today the June $10 calls were trading at around $1.20 when FAS was about $9.70. This limits your downside risk.
Thats actually a brilliant hedge, buy the long term calls on FAS if you won FAZ...
About the decay its 100% true and accurate...

I have been holding for a while now and I see the move back up for FAZ is much harder and is not corresponding to the levels that Rifin and the financial stocks were at when it dropped.

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Old 05-21-2009, 10:50 AM   Nav to Top  #8
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FAZ/FAS are crazy!!! I've been waiting for FAZ to hit $5 to buy. I got impatient a couple of days ago and bought in at $5.55, and then it sank to around $4.70. I was kicking myself, but luckily it is up to $5.52 right now. Another couple of down days and I'll hopefully hit my $6.20 sell point.
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Old 05-21-2009, 01:03 PM   Nav to Top  #9
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Hehe yeah I've been on the FAZ train from the moment I wrote this article. $4.97 - $5.54. Not a bad run but no stomach for any more here. Broke my own rule and held over night to boot. Banks are due to continue retracing, but I'll take the green now and rotate into something else.

Some other leveraged ETFs I like:
  • Direxion Technology Bull 3X Shares (NYSE:TYH)
  • Direxion Technology Bear 3X Shares (NYSE:TYP)
  • Direxion ProShares Ultra Real Estate 2x Dow Jones U.S. Real Estate Index URE
  • Direxion ProShares UltraShort Real Estate 2x Dow Jones U.S. Real Estate Index SRS
  • Direxion Energy Bull 3X Shares (NYSE:ERX)
  • Direxion Energy Bear 3X Shares (NYSE:ERY)
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Last edited by Miles; 05-21-2009 at 01:10 PM..
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Old 05-21-2009, 02:00 PM   Nav to Top  #10
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Originally Posted by Miles View Post
Hehe yeah I've been on the FAZ train from the moment I wrote this article. $4.97 - $5.54. Not a bad run but no stomach for any more here. Broke my own rule and held over night to boot. Banks are due to continue retracing, but I'll take the green now and rotate into something else.

Some other leveraged ETFs I like:
  • Direxion Technology Bull 3X Shares (NYSE:TYH)
  • Direxion Technology Bear 3X Shares (NYSE:TYP)
  • Direxion ProShares Ultra Real Estate 2x Dow Jones U.S. Real Estate Index URE
  • Direxion ProShares UltraShort Real Estate 2x Dow Jones U.S. Real Estate Index SRS
  • Direxion Energy Bull 3X Shares (NYSE:ERX)
  • Direxion Energy Bear 3X Shares (NYSE:ERY)
Thanks for those!
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