irondoor91

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  • 2008: A Great Year for Short-Sellers
    Here's and example of how an investor could use the double inverse ETF's to hedge the stock-only portion of his portfolio. For illustration purposes, let's assume a portfolio of $1 million in either individual stocks or funds. Further, let's assume that the investor holds his stocks in a brokerage account that has margin borrowing available. Depending on the type of stocks held, the investor can determine which double inverse ETF would most closely track his portfolio (DXD for the Dow, SDS for the S&P 500, QID for the Nasdaq 100). He would then purchase, on margin, and amount of the double inverse ETF to equal half the $1 million stock portfolio. For example, assume that he decideds to use the double inverse ETF on the S&P 500 (SDS). Assume that it is priced at $63.29 (yesterday's close). To fully hedge his portfolio, he would purchase $500,000 of the SDS. $500,000 divided by the per share price of 63.29 indicates that he should purchase approximately 7,900 shares of SDS. To visualize how this works to hedge the portfolio, assume that his stocks decline 10% to $900,000. SDS should increase by 20% (double the inverse), to make up the $100,000 loss on the stock portfolio. If his stock selection outperforms the market, he will come out ahead. Conversely, if his stocks underperform the market he will still lose money in spite of his hedge. This analysis does not take into consideration the costs of ownership of the stock portfolio, commissions, interest paid on his margin account and the internal cost of operations inherent inside the ETF. While these inverse ETF's are one of the simpler and easier to use hedging vehicles for retail investors and have proved popular and profitable during the current stock market weakness since last October, they will more than likely disapoint investors who have no disciplined method of timing the swings in the market.
    Aug 28 11:08 am |Rating: 0 0 |Link to Comment |View article

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