FAZ and FAS - A trading strategy

Question

I think I am going to try the below strategy when I get the chance.

Wait until FAZ or FAS spike significantly one day. Probably should have done this when FAZ was up 3 days in a row and spiked to $5.37.

However, wait until FAS spikes up today and then short it.

Then wait until FAZ spikes and short it.

You are then locked in at permanent gains and then as decay takes place your gains get larger and larger.

A working example:

On May 29th the combined value of FAZ and FAS was $14.70

After yesterdays closing the combined value was $14.07 . . . or a modest 4% gain due to decay.

However, if you short at right time each you can really build on those gains. Just a thought.

Good trading.

VirginiaHoldem2 · Answer

I think I am going to try the below strategy when I get the chance.

Wait until FAZ or FAS spike significantly one day. Probably should have done this when FAZ was up 3 days in a row and spiked to $5.37.

However, wait until FAS spikes up today and then short it.

Then wait until FAZ spikes and short it.

You are then locked in at permanent gains and then as decay takes place your gains get larger and larger.

A working example:

On May 29th the combined value of FAZ and FAS was $14.70

After yesterdays closing the combined value was $14.07 . . . or a modest 4% gain due to decay.

However, if you short at right time each you can really build on those gains. Just a thought.

Good trading.

wallstreetcappers · Answer

I wonder if that decay keeps consistent or it is due to a drop in volatility and the VIX?Or as options expire and are renewed that the pricing is influenced?

VirginiaHoldem2 · Answer

Yeah I am really not sure. Just know that the decay is there. I mean when both of these things started back in January or so both were in the 40s. Now look at them!

Not sure how they will fix this. Maybe a reverse split?

For this strategy to work though you want it very, very volatile as that is how you really get the decay to work.

Now, I wonder how it would work if say FAZ were to double to $10 at some point. That is the only thing you need to worry about.

I guess for that to happen FAS would have to plummet. But this strategy is to only be employed for a month at a time where you can probably get a nice 10% gain.

I threw a couple trades out there today. Shorted FAS at $9.37 and FAZ at $4.93.

So . . . we shall see what happens. Nothing big. Just a couple thousand on each as a test run to see how it works.

Wake2002 · Answer

I am interested to see how this goes.   Short term, I think you are exposing yourself to a lot of risk, just a couple of thousand on each doesn&#x27;t mean much when you are naked shorting as I assume you are doing.  Like you pointed out in your post, mathematically, if either was to double (or more) in a short term move, you&#x27;d find yourself down considerably from a percentage standpoint.  (Picture FAS at $18.74 and FAZ at $2.47, or even FAS at $27 and FAZ $1.50 and what that would do to your shorts, and you will see what I mean).  I question your rationale for doing this a month at a time.&#xD;&#xA; &#xD;&#xA;That being said, I have seen the similar decay in these type of investments that you have seen, and I have thought about doing exactly what you are doing.  I have had a hard time envisioning a scenario of how this wouldn&#x27;t work over a long term period, if you were willing to let it go, and not cover on a potential short-term run-up where you might find yourself down alot.  I just think to guarantee that it will work, you need to have a longer time horizon than the month like you are suggesting.

VirginiaHoldem2 · Answer

I think the only way you "lose" in this strategy is if the market goes on an incredible tear in either direction. Sort of like when FAZ rose from 40 to 200 . . . and then on the flip side when FAS rose from 3 to 12.

9 weeks in a row up (or down) could cost one in this strategy.

However . . . I think we are going to muck around for a while in this trading range of 8000 to 9200 . . . i think.

I'll let you know how I make out. Just a small amount invested. You have my starting points though. Obviously I hold more FAZ shares than FAS. almost a 2 to 1 ratio.

The best thing for this strategy is to have the market go up 20% one day . . . then down 20% the next day and repeat.

FAZ and FAS - A trading strategy

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