redsturgeon wrote:Last week for the first time in my life I went short on the FTSE100 with a 2x short ETF. I am watching it closely but it seems to be working so far.
Hopefully you took the chance to get out in the recent 7-8% drop, load up again later.
Personally I'd begin this sort of trade with about 0.3% of my cash, if I wanted to end up with 3% exposure and leg in over about five trades, though 3% is maybe okay if you can promise yourself not to buy any more. It's a real widowmaker, this one.
Here's the maths: You buy £100 of FTSE double-short ETF when the FTSE costs 100. First day FTSE goes up 10%. It's now worth 110, but you just lost 20%, so your ETF is worth £80. Next day market dives by 9%. It's back to 100. Your ETF rises 2x9%=18%. Your ETF is worth 1.18*80 which is 94.4.
So in two days the FTSE has not changed its value but your ETF is down more than 5%. That's not good. Now obviously, the moves are not going to be so big each day but 1. after many little moves you will as surely lose money and 2. given the market is so volatile those losses will be much larger than they were back in January/February, say.
About the only thing that will save you is a near-term violent fall in which you close your position. Then you might get your money back or even a bit more. But without the golden timing this trade is bleak at the moment.
If you want a short punt, I think short futures look a much better bet. But I prefer to get paid to just wait and see in these conditions (almost taking the other side of your trade). Future direction is hard to pick, IMO, and for the FTSE in particular the path of least resistance is up: some parts of it still look really bombed out.