re: BOIL has become predictable

wow...that was quite a pop and drop

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wow...that was quite a pop and drop

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No kidding

Looks like UGAZ leveled off a tad around the 17.7-17.8 range. For now...

Simply not true I have 3k of dgaz @2.55 if you'd have bought yesterday on 8k investment you can make almost 2 grand....with only a jump to 3.10

Can someone explain the time decay to me? I must be missing it. I'd imagine if I buy shares of UGAZ today at current price and trade them 6 months from now, I'd get the price at that time. Is this wrong?

Looking at the chart for UGAZ, if you had bought it July 23rd at 13.83, couldn't you sell it today for $17.20 and take your profits? Or is there something I am missing here related to time decay- do the shares you bought waste away?

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Or is there something I am missing here related to time decay- do the shares you bought waste away?

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they don't decay to nothing, but supposedly they do lose some of their value each month when the roll over the futures contracts on leveraged ETF type instruments. I"m sure golfer or force can better explain it. Though I've read quite a bit and I really think no one completely understands it .

I think this is why people say leveraged ETFs/ETNs are bad long term investments and only suitable for trading.

It has to do with decay on the underlying. Since the leveraged moved 3x the price of the underlying, eventually the volatility creates a disconnect between the return on the leverage and the return on the underlying.

So, say the underlying is currently 4.5. In 6 months it's 5. You probably won't make quite 33.33%. That's due to the time decay in the leverage.

Seeking alpha has an article on it.

I think there are different issues. One if the compounding type effect you're talking about, the other is the rolling of the underlying futures contracts which can cause a loss of value outside the compounding effect

'But it gets worse than that. For leveraged ETFs that use futures, leveraged ETF decay is compounded by what's known as the "roll yield." Every month, these ETFs have to roll over their futures position from the current front month to the next front month. But the price for the new front month can be less favorable because of backwardation or contango. Even more importantly, savvy traders learn the rollover dates and front-run these ETFs, so the ETFs get particularly bad prices. You can see the results of this in unleveraged commodity ETFs like UNG and USO, which consistently underperform the underlying commodities. In recent years, this underperformance has been as much as 20%.'

seeking alpha article

ETA: please check your link, doesn't seem to work

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Simply not true I have 3k of dgaz @2.55 if you'd have bought yesterday on 8k investment you can make almost 2 grand....with only a jump to 3.10

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My statement was based on the previous assumption of having to hold DGAZ until spring, not meant to come out against taking a position in DGAZ. I think you were right on with your DGAZ target.

Back to time decay. It can be seen just how severe it can be by doing a YTD comparison. Since Jan 1 2014:

Natural gas +12.4%
BOIL +0.9%
UGAZ -17%
KOLD -45%
DGAZ -70%

Every ETF loses money compared to investing in natural gas. UGAZ comes out pretty badly, in theory it should be up 36% but in fact is down 17% due to time decay. This is over 10.5 months.

Now if we go to 3 months:

Natural Gas +10.3%
UGAZ +23.5%
BOIL +18.2%
KOLD -38%
DGAZ -40.7%

There is some time decay, UGAZ should have been up 30% and BOIL should have been up 20%. It's not that terrible though.

The numbers for 4 months:

Natural Gas +3.4%
UGAZ +4.1%
BOIL +0.2%
KOLD -19.6%
DGAZ -33%

The time decay becomes more obvious than at 3 months since UGAZ should have been up 10% and BOIL up 7%.


This is why holding these ETF's for more than 3 to 4 months is a bad idea.

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The time decay becomes more obvious than at 3 months since UGAZ should have been up 10% and BOIL up 7%.

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"To their credit, leveraged ETF managers have figured out that they need to be absolutely clear about the ramifications of their strategies over longer periods of time. Direxion is very clear that it only seeks daily returns, not long-term returns, building the daily aspect into each fund's name. It would be harder for Direxion to be clearer about these funds not being suitable for most long-term investors."

This being true, wouldn't long term shorts of leveregaed etfs be a no-brainer?

ETA: yes, I know shorting UGAZ could have gotten one hammered last year, I'm talking generally...or maybe short both UGAZ and DGAZ or similar pair...