I know it sounds redicalus, it’s supposed to! There is no ultimate guide to anything, just peopleseses beliefs and opinions.
Before I begin, I’ve posted the chart with the measurements here at Tradingview. It can be viewed by anyone, even without an account. Head back to the Notes page to check out the other parts of this series.
So I keep revisiting this idea that I’m going to come up with a smooth, yet profitable way to short UGAZ, the most decaying son-of-a ETF that exists. People say “you gotta have a lot of money to do this, to help cover the cost of going backward on the trade”. This is partly true. A trader is not required to have “a lot of money” to short UGAZ. All that is required is enough money for a margin account. say $2000?
UGAZ is on a list of “hard to borrow” stocks/ETFs. Because UGAZ decays, it is indeed popular to short. When someone short sell shares of an ETF, they must borrow those shares from somewhere in order to sell them on the market. When everyone wants to borrow shares to short them, they become hard to borrow. Some brokers, I would imagine, don’t even deal in hard to borrow. TD Ameritrade only allows hard to borrow shares with $100k in the account, unless you can convince them otherwise. I’ve heard Interactive Brokers or E-Trade are good brokers to go with in order to short leveraged ETFs, such as UGAZ. I have not checked with Schwab or Tradestation yet. I’ll be revisiting this idea over time.
On to the chart
Right off the bat, I want to show the biggest danger I could find to show first. From about mid July to November 14, 2018, UGAZ went up around 427%. This means if you were to short with $1000 position on July 18th, you would need $4270 to keep from being forced out of this position on Nov 14th. On a larger scale, a position that costs $100,000 would require $427,000 to keep from being forced out left with $0 in your account or possibly a negative balance.
With that said, this was the worst case scenario shown for UGAZ. 2019 was a whole different story.
If a person shorted UGAZ at the beginning of Jan 2019, which also happens to be the lowest point that UGAZ traded in January. After immediately going backward 76%, UGAZ had one of the best years ever for holding short. Late summer/early fall shows a backward move of 118%. Overall 2019 gained 81% on the short side, trading from beginning to end. I am showing an entry at the lowest point in Jan to be conservative in my estimation. Had someone shorted with a $1000 position ( $1116 needed for the equivalent of 3 shares), they would have needed roughly $2000 to go backward in Jan. If held until today, they would have a gain of $897 or roughly 81%.
To put things in perspective, a person would need anywhere from 2 to 5 times the amount of funding to hang on a UGAZ short position for the long term. This is why “it takes a lot of money to short leveraged ETFs”.
I’ve looked at the entire history of UGAZ and broken up by year the gains and max backward moves. These numbers are very rough, so do your own analysis if you plan to get serious about shorting UGAZ. I will show the gain for each year and max backward moves. The max backward move may be any time that year. Also my gains are based on the lost start to each year to the lowest end to each year. I’m wanting to just show decay and be conservative in my gains. Better gains stand to be made by being more active with the trading.
- 2019: 81% Gain – 118% Backward
- 2018: 25% Gain – 427% Backward
- 2017: 80% Gain – 73% Backward (118% heading into 2018)
- 2016: 22% Gain – 172% Backward
- 2015: 93% Gain – 92% Backward
- 2014: 79% Gain – 140% Backward
- 2013: 5% Loss – 147% Backward
- 2012: 15% Loss – 192% Backward
2012 was not a full year, this was the year UGAZ began trading. I have put a lot of emphasis on the dangers of shorting UGAZ. I will give one of the better scenarios for improving gains; 2012 had the worst year for a buy and hold short. 2012 NG prices were moving from below $2 to above $3.5; a buy and hold short obviously was not the best option. Trading around a core short position may have been a good choice. Keep in mind that prices did move backward in big ways that year, so the danger of getting a margin call are still very real.
Last reason why I’m showing the short positioned gains at he bottom of UGAZ. There exists a danger that is worse than making sure there is enough money to hang onto a short position in UGAZ. The shares “borrowed” to short UGAZ belong to someone else who bought them. The broker who loaned them out to will do their best to keep from taking them back, but there is a chance the shares will be taken back without question or warning. The shares can be bought back an any time in order to give them back to the person who needs to sell them on the market. This is most likely going to happen when the price is at a high point. So not only must a position stay funded well enough, it could still be covered at the worst time possible, at the top. Think of it this way, the person who bought those shares of UGAZ, wants to make money and will need them back at some point to sell, preferably when the price is up.
I must be getting old, I forget what I write about, then turn around and write more about the same subject matter. For more emphasis, with better examples, check out Part 1a. To learn how I plan to prevent from catastrophic loss? I’m going to expound on this in Part 2. I’ll leave you to mull over the dangers of shorting leveraged ETFs for now.