Proshares Ultra Inverse ETFs

July 13, 2006 1:43pm by Barry Ritholtz

The double inverse shares are now trading (albeit barely).

UltraShort QQQ	QID	$72.88	NASDAQ-100
UltraShort S&P500	SDS	$71.54	S&P 500
UltraShort Dow30	DXD	$71.56	DJIA
UltraShort MidCap400	MZZ	$71.68	S&P MidCap 400

To reiterate my views on the single inverse shares (which also apply here):

• They trade intra-day; you are not limited to end of day pricing; This makes them superior to the Rydex Ursa mutual funds;

• They are are rather illiquid; even less liquid than the plain inverse funds; (this may change over time);

• They are allowed in retirement/tax
deferred accounts; Not only can you now short in these accounts, you can now do so with leverage; (This could be a major negative for overly aggressive or undisciplined investors);

• They are inferior to the Qs, Diamonds or
Spyders. With the uptick rule exmption for ETFs, I am hard pressed to
see why you would want to use these outside of the tax deferred accounts;

• They trade with an even fatter 7 to 15 cent spread. As noted before, the Qs are liquid
as all hell;

• Again, there’s that odd pricing delay. As I type this, with the Nasdaq down 20 and the Qs off by 35 cents, the PSQs (Inverse Qs) are down more than QIDs (Ultra short).
Hopefully, that weirdness won’t persist as they begin to trade more.

The Bottom line remains:
These are good product for hedging in accounts that either cannot short or use
options; And while they are also superior to mutual funds, they remain are inferior to
traditional ETFs. Hopefully, as they become more popular and liquid, these pricing / spread / delay issues will work themselves out.

I consider these a work in progress…

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Brandon commented on Jul 13

I think that I see the fat lady on stage. I can’t tell if she has started singing yet, but the audience is apparently getting nervous.
minmex commented on Jul 13

Thanks a ton for pointing these out. I am only a newbie trader inside my IRA for now, but these are working out nicely. I’m in the PSQ for the moment. It’s nice to make some money when all the prices are red for once.

MX
Eddy commented on Jul 13

Very photo-shopped, but still amusing.
jab commented on Jul 13

I purchased some QID in an IRA mid day – already up – nice start.
jjr commented on Jul 13

I rather like the QID idea, taxable account or no. I think liquidity will find its way into these ETFs, and the spreads and such will improve. Rather crazy movement at the end of day. I had an order to buy in at 74.80, and was improved to 74.65, and price almost immediately recovered back above 75.

Better than USPIX. More flexible, and allows intra-day activity. Arguably more flexible than QQQQ puts, which you have to contend with slippage and expiration as well. Seems a viable alternative to shorting the QQQQs even in a taxable account. But, then I have cut my teeth with illiquid, microcap, low float type equities, so the activity in QID is more than acceptible, especially since it should only improve.
Larry Rhea commented on Jul 13

Warren Buffet has called derivatives, “Weapons of mass financial distruction.” To make a fund pay you $200 if the DOW goes down $100 requires the use of derivatives as stated in the Rydex prospectus. In derviatives, there is a party on each side of the bet. The danger is that in a crash, one side will welch on their obligation. You’ve been warned.
phil commented on Jul 13

warren buffett is a hypocrite and one of the biggest double talkers out there. derivatives are weapons of mass financial destruction? ok…….. doesn’t stop him from using them despite his much toutes “troubles” at general re.

see link:

http://www.mineweb.net/columns/curve_ball/167743.htm
phil commented on Jul 13

hey Larry, there’s this thing called a clearinghouse, you might want to check into it…..
jkw commented on Jul 14

Even the clearinghouses have a limit to how much of a loss they can cover. How many millions of contracts representing billions of dollars is CME covering? The nominal value of all their long contracts is probably close to $1Trillion. A severe crash could leave the long side owing $500B. CME could easily get stuck with $50B or more of the liability. It is an unlikely event, but the clearinghouses can fail. Although I would bet that they take out insurance against major market moves that lead to mass failures in obligations. The circuit-breakers might also limit the one-day moves enough to prevent CME from actually losing money. And if you’re short futures when the market crashes, you’ll get a lot of money even if you don’t get everything you are supposed to.

Anyway, having any of the clearinghouses fail would represent much larger problems than a few thousand dollars missing from your account. It’s like worrying about a larg-scale nuclear war. It is extremely unlikely and if it does happen, it is the worst-case scenario and whatever planning you tried to do ahead of time is useless, so it’s best to just assume it won’t happen and hope that if it does, you manage to surive somehow. An event that could actually kill a clearinghouse would possibly take out Loyds of London, several major stock brokers, and a good part of the world’s financial system.
Shek commented on Jul 14

Barry (and others) –

Which of these indexes do you feel to be prone to the largest decline in 2006?

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