StockFetcher Forums · Filter Exchange · Short DUST & NUGT<< 1 2 >>Post Follow-up
Kevin_in_GA
4,599 posts
msg #140147
Ignore Kevin_in_GA
12/16/2017 10:48:58 AM

Respectfully disagree - you really should be looking at this ROI and comparing it against other investment returns one could have made with the same funds. What this approach does is reduce risk, but the absolute return does not care about the risk you might have encountered.

In other words, how much total profit have you made on this set of trades? Looks like you have made $697 on an initial investment of $55,966 (1.2%) in a month. That certainly beats the long term average return of the S&P 500 at a much lower risk, but don't think that the return is higher just because the directional risk is low. The return is an absolute dollar value that does not care about directional risk.




pthomas215
1,251 posts
msg #140148
Ignore pthomas215
12/16/2017 11:15:15 AM

Very interesting discussion, and one we actually had in business school. Having been CFO of multiple companies, you determine a cost of capital for one reason...to determine the price of funds you guarantee that nobody else could get in comparable investments. I dont do pair/offset trading because of this...you tie up too much capital for too few gains imo...said another way, you forgo the opportunity cost of gains with that additional capital you tied up in the pair/offset trade. That said, you trade in accordance with your risk tolerance..whatever works for you as you put your head on your pillow.

BarTune1
441 posts
msg #140149
Ignore BarTune1
12/16/2017 1:25:16 PM

Even if you want to measure this against funds committed it wouldn't be the overall position. You are receiving cash on the short sale so you certainly are not out anything.

All you are really out is the margin requirement to undertake the short sale ... and that is primarily an opportunity cost. Its tough to compare the ROI on that asset allocation to a "market return" because if you otherwise committed the funds to the SPY for example, you are taking full market risk on the position.

One of the predominant ideas behind this trade is that you are taking minimal risk. Consequently, for the "risk-free" portion of the trade (i.e., fully hedged), the appropriate comparable measures should be the risk free or T-Bill rate.

I also acknowledge there are a number of other factors at play here which could include borrow costs etc.

BarTune1
441 posts
msg #140275
Ignore BarTune1
12/20/2017 10:25:00 PM

Update -

Ok, this trade has been going on a little over a month. Currently up $1,005.50 ... Net directional risk is only $1,128 which is the difference between the market value of the short NUGT postion versus the short DUST position. Basically you are 100% hedged to the extent that the values are equal.

So, I don't really care how you define ROI - which can be calculated several ways. I typically look at return vs. directional risk. I do however agree that measuring return versus capital committed is also valid if not the norm. Because however we are dealing with double short positions, that are direct hedges, I'm not sure it would be best to measure ROI based on the aggregate size of both positions as you are short and not out of pocket to acqurie these positions in the same way you would be acquiring them in cash. Perhaps it would be best to consider the positions versus the margin requirement to take the short positions - represting an opportunity cost.

Regardless of how you calculate return, I think $1,005 where you are only assuming market risk of around $1,200 basically over a 1 month period is pretty respectable.

Sym Qty Close Cost Chg Cost Mkt Val Gain/Loss

DUST -1300 $26.04 $26.783 -$0.74 -$33,852.00 -$34,817.90 +$965.90 [+2.77%]
NUGT -1200 $29.15 $29.183 -$0.03 -$34,980.00 -$35,019.60 +$39.60 [+0.11%]
-$68,832.00 -$69,837.50 +$1,005.50 +1.44%



BarTune1
441 posts
msg #141505
Ignore BarTune1
1/29/2018 6:13:52 PM

I have not updated this for a while. It takes time to play out. Currently up $2,676.50. Net directional amount at risk is $10,143 ($38,652-$28,509).

Sym Qty Close Cost %Chg MktVal Cost %Chg
DUST -1300 $21.93 $26.783 -$4.85 [-18.12%] -$28,509.00 -$34,817.90 +$6,308.90 [+18.12%]
NUGT -1200 $32.21 $29.183 +$3.03 [10.37%] -$38,652.00 -$35,019.60 -$3,632.40 [-10.37%]

-$67,161.00 -$69,837.50 +$2,676.50 +3.83%

StockFetcher Forums · Filter Exchange · Short DUST & NUGT<< 1 2 >>Post Follow-up

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