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A small X-Mas present; concept for leveraged ETF Arbitrage

  • #1
  • First Post: Dec 24, 2019 11:01am Dec 24, 2019 11:01am
check your brokers, if their terms & conditions meet the criteria, for a professional trader (low margin rates!) 40percent per annum are feasible, as long as the broker allows it ;-)
clever ones use two brokers, one per leg of the ARB. Margin reqs rise, but risk of detection goes zero


L.E.A. leveraged ETF Arbitrage

Profit Criteria:

ss > 0
ss x L x ETF > sl x LETF

Yield Criterion:

[ss x L x ETF] - [sl x LETF]
---------------------------------------------- > ymy
[ms x L x ETF] + [ml x LETF]


ss swap (finance rate) short positions
sl swap (finance rate) long positions
LETF a leveraged ETF of your choice, should have an un-leveraged counterpart for replication
L leverage factor
ETF the non-leveraged ETF
ms margin requirement short position
ml margin requirement long position
ymy YOUR minimum yield


WARNING: This is only a statistical Arbitrage, ie running above positions your expectation value is (highly) positive but still path dependent. In times of significant trends (up or down) above Arbitrage performs perfectly well due to the compounding effect of the leveraged ETF, in times of mere volatility the "death drift" (-0,5 x Variance(LETF)) of the ETF becomes effective.

For a fully fledged Arbitrage options have to be added. With options the complete range of potentially realized returns (= Variance Spectrum) can be covered.




happy x-mas and a prosperous new year
  • #2
  • Dec 29, 2019 12:33am Dec 29, 2019 12:33am
uhhh what ???

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  • #3
  • Dec 29, 2019 1:52am Dec 29, 2019 1:52am
Quoting eztrader1
check your brokers, if their terms & conditions meet the criteria, for a professional trader (low margin rates!) 40percent per annum are feasible, as long as the broker allows it ;-) clever ones use two brokers, one per leg of the ARB. Margin reqs rise, but risk of detection goes zero L.E.A. leveraged ETF Arbitrage Profit Criteria: ss > 0 ss x L x ETF > sl x LETF Yield Criterion: [ss x L x ETF] - [sl x LETF] ---------------------------------------------- > ymy [ms x L x ETF] + [ml x LETF] ss swap (finance rate) short positions sl swap (finance rate)...
I don't understand your tribe's speech.
Please excuse the bad English via Google Translate.
  • #4
  • Dec 29, 2019 8:20pm Dec 29, 2019 8:20pm
It's a dialect of the universal tongue, a form of mathematics.

First you check, whether your broker offers a positive swap on your short positions: ss>0

Then you check whether the combined position (short L-times the simple ETF and long the leveraged L-ETF) has a positive result;
profit on short position: ss x L x ETF-Value
cost on long position: - sl x LETF-Value
net of long/short: n = ss x L x ETF - sl x LETF

Finally you set the positive net result in proportion to your funds invested, which is mainly your margins (of course bid ask spread can be considered as well):

n/margin = your achievable yield; compared with your personal yield target, you can decide whether to do all that trading, or not


of course a broker that has a charge of 3% or more on his swaps, will currently show no positive result at all,

unfortunately US interest rates have fallen, but at its highs you got 2,5% with a fair broker charging +/-1,0%, you would have earned 1,5% on your short positions and you would have paid 3,5% for your long positions.

shorting an ETF three times would have earned you 4,5%, hedging the short position with a 3x ETF would have cost 3,5%, your net result was 1%
bringing margins of 3 x 5% and 10% (=25%) resulted in a final yield of 4% (=1/25)

bringing the charge down to +/-0,50% and halving the margin rates your final yield is quite sizeable at 24% (=3/12,5)

if you are able to built the costly positions with a swap free broker the figures improve as well ...

or you find a forward broker, that allows short selling
  • #5
  • Dec 31, 2019 9:26am Dec 31, 2019 9:26am
if I wanna make 4% i'll just invest into a low-risk mutual fund....whats this nonsense...
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  • #6
  • Dec 31, 2019 10:25am Dec 31, 2019 10:25am
not weighing on the viability of this system either way - but the OP said 40% returns are feasible, not 4%

blam

Quoting tiestobob
if I wanna make 4% i'll just invest into a low-risk mutual fund....whats this nonsense...
  • #7
  • Dec 31, 2019 3:05pm Dec 31, 2019 3:05pm
yes, depending on your broker, it can be a mere 4% or even less.

THat is the reason, why I have stated above criteria. Check them with your brokers!!!!

Or start looking for a broker with better terms and conditions!!

I gave you the universal model,

do not ask now for the brokers. Some (own) efforts should always precede success!
  • #8
  • Dec 31, 2019 4:14pm Dec 31, 2019 4:14pm
Quoting eztrader1
yes, depending on your broker, it can be a mere 4% or even less. THat is the reason, why I have stated above criteria. Check them with your brokers!!!! Or start looking for a broker with better terms and conditions!! I gave you the universal model, do not ask now for the brokers. Some (own) efforts should always precede success!
Tnx. But I personally understood zero from your explanations. Perhaps you can use terms that do not involve broker jargon as many of us here are retail customers.
Also, if this system(or whatever u wanna call it) depends heavily on the right broker, you definetly have to suggest the correct brokers.
If you think finding the right broker for any system is not important, think again. That is the most important part of a traders tools, it is the first thing any trader should resolve before entering even a single trade.
Hbr.
  • #9
  • Jan 1, 2020 12:25am Jan 1, 2020 12:25am
Quoting eztrader1
yes, depending on your broker, it can be a mere 4% or even less. THat is the reason, why I have stated above criteria. Check them with your brokers!!!! Or start looking for a broker with better terms and conditions!! I gave you the universal model, do not ask now for the brokers. Some (own) efforts should always precede success!
I hate puzzles in forex.
Please excuse the bad English via Google Translate.
  • #10
  • Jan 4, 2020 1:24pm Jan 4, 2020 1:24pm
If there is anybody really of the opinion, that my naming of a broker
would help him to make money, should invest all his money in money market funds,
because his mental capacity will never suffice to succeed in trading or arbing.

As soon as I name a broker, this broker will adapt its conditions, and the arb is gone anyway.
You have no idea how innovative a broker can be in inventing new charges and fees.

I have developed 5 ARB-systems so far,
for the first I was accused by my broker of unfair trading practice;
we finally agreed on my collecting of the profits for one year and never placing this arb with him again.

The second arb, was my first etf arb. As consequence after half a year I was charged backdating platform fees,
never mentioned in any T&C paper before. Again, I agreed with this broker on getting my profits achieved that
far and stopped to arb him (that way).

Actually I was legally on the right side in both cases, calling the Ombudsman, I would have won my cases. But the brokers would
adjust their T&C afterwards making the arb impossible anyway. So I decided to stay low profile, to collect my profits and keep the
door open for any other trader, who might detect the arb opportunity and who might utilze in a more subtle way avoiding the attention of the broker

All arbs from then on I run also in a more subtle style. Either I use several accounts or even several brokers for the different legs of the arbs.

Beside the standard carry trade arbitrage, the leveraged ETF ARB is one of the simplest concepts, so I thought there might be some interest in this concept
and I posted it.

But
I really have the feeling, nobody here understands, what a real ARB is.
How precious, how seldom, how special.

Perhaps Admin should kill the whole thread.
  • #11
  • Jan 4, 2020 3:06pm Jan 4, 2020 3:06pm
The point is, you have to explain in layman terms what your ARB strategy is and how it works in detail, else 90% here wont have a clue thus not a xmas or any type of gift at all.

I doubt the brokers will recognize your nickname and change all their rules once you mention their name here.

My point about brokers has nothing to do with whether they allow ARB or not. The point was to mention an honest(the most honest) broker that at least we can almost guarantee to collect our winners and that we wont get crushed by slippage whenever they decide that we are too profitable.
  • #12
  • Edited Jan 5, 2020 11:45am Jan 4, 2020 5:51pm | Edited Jan 5, 2020 11:45am
Isn't this similar to a carry type trade, your yield is your swap? Find a broker who pays good positive swap on EURUSD shorts and say EURCHF longs and then a zero or very low swap broker on USDCHF shorts? Set the right lot sizes to be fully hedged and wait a few months.

As you say it's all about the T's and C's. Profits can be withheld. It's their playground after all.
  • #13
  • Jan 4, 2020 8:36pm Jan 4, 2020 8:36pm
Quoting swd
Isn't this similar to a carry type trade, your yield is your swap? Find a broker who pays good positive swap on EURUSD shorts and say EURCHF longs and then a zero or very low swap broker on USDCHF long? Set the right lot sizes to be fully hedged and wait a few months. As you say it's all about the T's and C's. Profits can be withheld. It's their playground after all.
i believe the concept is that you mentioned but i think it also requires some injection of new trades at times to keep the portfolio in the green. so basically from what I understand is, you open trades (and if you're smart, you'll use more than 1 broker) such that the pairs counteract each other in terms of price movements, but their swap pays overall positive. and for that to happen, you need to select your positions as well as your broker in such a way that the yield > 0. however, i'm still a bit confused as to how to calculate all that. it is all mathematical
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  • #14
  • Jan 5, 2020 3:16am Jan 5, 2020 3:16am
Quoting tiestobob
{quote} i believe the concept is that you mentioned but i think it also requires some injection of new trades at times to keep the portfolio in the green. so basically from what I understand is, you open trades (and if you're smart, you'll use more than 1 broker) such that the pairs counteract each other in terms of price movements, but their swap pays overall positive. and for that to happen, you need to select your positions as well as your broker in such a way that the yield > 0. however, i'm still a bit confused as to how to calculate all that....
It doesn't really matter. I've been trading ARB for years institutionally and I haven't done yet what is described above. It's too much hassle. Retail stat ARB is a thing of the past now that exchanges and brokers tech has caught up. Good luck to all that try it.
  • #15
  • Jan 5, 2020 11:25pm Jan 5, 2020 11:25pm
Quoting swd
{quote} It doesn't really matter. I've been trading ARB for years institutionally and I haven't done yet what is described above. It's too much hassle. Retail stat ARB is a thing of the past now that exchanges and brokers tech has caught up. Good luck to all that try it.
so what are you doing now then?
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  • #16
  • Jan 13, 2020 10:35pm Jan 13, 2020 10:35pm
Last attempt:

Ticker SPY .... Index ETF replicating the S&P 500 Index 328,-$
UPRO ... Index ETF replicating the S&P 500 Index; BUT THREE TIMES the daily return; 74,-$

r(UPRO) = 3 x r(SPY)

SPY UPRO SPY UPRO SPY/UPRO
+5% +15% +16,4$ +11,1$ 1,48
+3% + 9%
+1% +3% +3,28$ +2,24$ 1,46
-1% -3%
-3% -9% +9,84$ +6,66$ 1,48
-5% -15%

going short in one SPY share and buying 1,47 UPRO shares results in a riskless position (dividends neglected), your P/L will be always around zero
your short volume is 328$, you should earn interest of 1,75% pa minus charge on it
your long volume is 109$, you should pay interest of 1,75%pa plus a charge on it

let the charge be 0,50% pa (1,00%pa); SPY will earn 4,10$ (2,46$) UPRO will cost 2,25$ (3,00$)
net interest: 1,85$ (-0,54$)
Margin: 5% x SPY + 10% x UPRO = 27,3
yield: 6,77% (-1,98%)


there are lots of double and triple etfs out there; the greater the difference in long and short volume the higher the yield achievable

another example is XLE vs ERX or SMH vs SOXL or DIA vs UDOW, etc. etc.


if there is no positive swap on short positions, there is no opportunity at all

if there is a positive return on short positions, you have to check the cost on the (hedging) long positions, if the yield is acceptable take the position else leave it

by the way, when using spread bets for all positions, your return might be even tax free

conditions have worsened, but as interest rates rise again this ARB becomes viable even with expensive brokers
  • #17
  • Last Post: Jan 14, 2020 6:38am Jan 14, 2020 6:38am
"by the way, when using spread bets for all positions, your return might be even tax free"

Hedging also get very interesting if you hedge a forex position with a spread bet position over the same market

https://www.forexfactory.com/showthread.php?t=51606

between 2014 and 2016 I had a forex broker and spreadbet broker that gave me net positive swap on completely hedged GBPNZD positions......I rinsed it for 2 years at 20% per year.......the only issue was hugh spikes.....and believe me they do come along
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