FAS and FAZ dual covered call trade closed

After playing around with this multi-dimensional derivative on derivative trade, I have closed it for a net loss of $0.06. My habit of buying back short options for a nickel is what kept this trade from being a winner. As in a total of $0.19.

What’s curious is that the credit taken in for short calls almost made up for the inherent price decay of the triple-leveraged financial ETFs. On a theoretical basis, the decay of OTM calls and the price of the ETF are almost identical.

I received $5.23 of credit during the 3-month experiment. We need to take away from that total the purchase of short calls for a nickel when they became available and my purchase of the FAS in-the-money call Friday afternoon. This totaled a debit of $0.75 against credit received for a grand total of $4.48 net credit.

I needed to buy back my ITM short FAS call expiration Friday afternoon to close the trade because it was ITM and I would have gotten my long stock called away anyway. I just avoided exercise fees and put this experiment in the books a few hours early. I paid $0.50 to buy back the ITM FAS call, the first time in three months I was faced with a short call being ITM.

The price I paid for long FAS and FAZ, and the price I received for their sale totaled a debit of $4.54. Even though these ETF are inverse each other, the purchase of both simultaneously is not a perfect hedge. In fact, it’s not even close. After three months and accounting for the reverse split, the decay was a stunning 25%. That’s not annualized.

About the only way to play these products is on a day trading basis, or maybe short them. Both of them. You’ll need to have some sort of Black Swan hedge in place, but I’ll let you figure that one out.

This brave new world of trading in which we can ‘invest’ in triple short ‘stocks’ in our IRA is quite interesting. Going long these ETFs makes about as much sense as being long OTM calls. But those regulating our retirement investments deem both these products suitable. Let’s not let the public short stocks in their retirement accounts though. That would be risky, you see.


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