Here is an example of a hypothetical index that starts at 1000
and goes up or down every day by 50 points. (1 day up, the next
down, the next up etc.)
And the decay effect shown if you short both 3X direct and
inverse in the amount of $10K each. As you can see, this is quite a
decay rate.
The problem is compunding is a two edged sort. If the market
trends for an extended period, it hurts considerably. As the second
table shows, if the same index goes up by 50 points a day for 20
days, then you are out of pocket by over 275% of your original
shorts, while the underlying index has only doubled.
Decay effect
More on brokers calling in shorts
Posted by mamaduck on 17th of Jul 2009 at 05:30 pm
Here is an example of a hypothetical index that starts at 1000 and goes up or down every day by 50 points. (1 day up, the next down, the next up etc.)
And the decay effect shown if you short both 3X direct and inverse in the amount of $10K each. As you can see, this is quite a decay rate.
The problem is compunding is a two edged sort. If the market trends for an extended period, it hurts considerably. As the second table shows, if the same index goes up by 50 points a day for 20 days, then you are out of pocket by over 275% of your original shorts, while the underlying index has only doubled.