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If the big brokers suddenly ban their own clients from using the levered ETFs, it could cause a selloff in both long and short ETFs at the same time. What might occur is a larger discount to the Net Asset Value (NAV) of all these ETFs. So, you might own QID and the Naz loses 2% on the day, and so you expect about a 4% gain in your QID (2x inverse), but the news breaks about a ban by big brokers, and so your QID is discounted to the NAV due to lack of interest by traders and the action of sellers who dump the stock first and ask questions later! So, instead of making 4% gain, in such a scenario, you might lose, say 4%! Think about that one a little…!
I believe the selloff would be somewhat brief but could hurt someone who is invested in them at the very moment this becomes a big news item. I have a couple in my portfolios right now, such as FXP. So, I’m a bit nervous about this for the time being, because one morning, we might wake up and find this is a big story in the news.
The worse case scenario could be a liquidity freeze! I don’t think that will happen, but it cannot be ruled out, especially with the less traded levered ETFs. Therefore, I think it is wise and prudent to only trade the most popular ones, such as SDS/SSO, QID/QLD or any that trade at least 500,000 in volume a day. The ones that trade less than 500k a day could see wide bid/ask spreads and could lead to difficult to fill orders, should this become big news…..and something tells me that it will.
…And as far as the 3x levered ETFs, be very careful!…as the bid/ask spreads on these could become as wide as a canyon during an illiquidity freeze caused by the actions of the big brokers! I’m not saying it will happen, but use caution and don’t have all your eggs in one basket should it happen.
Mr. xxxxxxx agrees with what I have said, and he was a professional money manager, so that should tell you to be careful.
Here’s another thought too: many of these levered ETFs use futures and options to achieve their levered look… for instance, SSO and SDS use many options contracts in the SPY at certain strikes to create the levered effect…if the big full service brokers ban these ETFs from their practices, does this create less demand for these options and suddenly cause the premiums for them to drop?In other words, do the values of premiums suddenly fall upon this news becoming a headline at CNBC?
Example: If you are a buyer of options in the SPY, and you buy, say a bunch of calls or puts in SPY, and suddenly, the lower demand by the levered ETFs (that are reacting to bad news in the media about big brokers banning them) causes the value of your option premiums to fall, does this hurt you? You might have a winning bet on call or put, but the lowered demand hurts the premium you can sell it at? This could be trouble for certain options! I don’t know, as I’m only speculating here…but something tells me this could cause havoc in the options of certain stocks and baskets of stocks! So, keep in mind that big stocks like QQQQ or SPY or certain financials in which the UYG and SKF invest could get hurt too! Or how about commodity based ETFs like USO, UNG (another one I own, which is not levered, but could react to the news anyway!)…
And with options, keep them spread out, so that all are not on one stock or popular basket stock like SPY or QQQQ or any big name stock like GOOG, AAPL, BAC, or whatever big name you can think of!
…and if you are loaded to the gills in these levered ETFs, they could wipe you out pretty hard upon any negative news that breaks on this subject….so lighten up and be careful is all I am saying!
APT! I had my eye on this one several times, but volume was weak a month ago when I last checked…well, it has caught on! Big move today! But now selling off from the high top…perhaps a good catch if it falls back under 3 bucks?
It was reported in the media yesterday that respirator masks are selling like hotcakes in Europe. APT is the purest play on surgical and respirator masks, including the N-95. -ACE
(Editor’s Note: This stock was recommended near $3.00 by Ace and it rallied by over 100% peaking near $7.60…Ace suggested to take profits shortly after that peak. )
Sir, please be careful! PCLN may be close to a yearly high, but remember that previous high does not reflect the current situation…this stock is in breakout mode, and all signals are “go” for the longs. The typical 20% trajectory from breakout pivot at $119 and the float burn rate well short of 50% suggests that the bulls are gonna keep this one going over $140 before it tops. IMHO!
The time to short will be when the ADX line ends its rising trajectory angle and MACD is ready for sinking crossover….any shorting before that point puts your bet at great risk! IMHO!
(Editor’s Note: Ace saved a shorter from a disastrous bet. The stock known as Priceline.com was up another $70 from where Ace stopped this shorter from committing short suicide. The lesson here is that though a stock may look over-priced, one has to understand the dynamics that are supporting its rise.)