Not trying to predict the market, but...

[c1ue]

I've been out of the market for almost 18 months other than a little options based play at the end of last year.

I bought SKF in August @130, then doubled up when it spiked down at 98 (after short selling ban).

But I'm taking profits: dumped out all of it at $179.97

This was a timed trade - 3 minutes before close today.

At this level - too scary to hold going into Friday and the weekend.

Now I have nothing at all in the way of bonds/stocks except for core MRK and IBM.

If we have a major recovery in the next few weeks and SKF drops down to 120s, I'll start considering going back in.

[laphroaig]

Re: Not trying to predict the market, but...

Can anyone explain what ETFs like SKF invest in when short selling on financial stocks is banned?

My understanding is that options trading is still allowed, but I'd expect the options market to be distorted, because writers of put options can no longer use short selling to cover themselves. If there's an unreasonable premium on puts, that would make it harder for SKF to achieve its goal of -200% x IYG.

Is the "friction" in a negatively correlated ETFs like SKF enough for the fund managers to absorb these kinds of costs?

Do the ETF managers match up investments in SKF against the opposite fund (IYG) and just maintain a neutral position in cash? I guess they could construct some"instrument" that one fund buys from the other to achieve this without having to "pool" the funds of the to ETFs (presumably illegal).

I can see that working as long as there's as many buyers of IYG as SKF. But what happens if SKF is more popular than IYG?

It seems like someone out there must be seriously exposed. Maybe it's ultimately the holders of SKF who bear the exposure?

[Tulpen]

Re: Not trying to predict the market, but...

Can anyone explain what ETFs like SKF invest in when short selling on financial stocks is banned?

SKF shares are created and destroyed by the resp. purchase and sell of a creation unit. Buying a creation unit for an ultra short fund typically requires the deposit of a number of shorted stocks plus cash. This required cash is adjusted daily. During a short ban no new creation units can be created but the existing units can trade without restriction. In such a case the fund operates more like a closed end fund and may for various reasons trade above the NAV.

[c1ue]

Re: Not trying to predict the market, but...

What Tulpen said.

And I'd like to thank the US government for giving me the chance to buy more SKF at under the 200 day moving average thanks to the now expired no shorts rule.

Now with the government directly buying into banks, another 'no shorts' period so I can do it again.

[bpr]

Re: Not trying to predict the market, but...

SKF shares are created and destroyed by the resp. purchase and sell of a creation unit. Buying a creation unit for an ultra short fund typically requires the deposit of a number of shorted stocks plus cash.

I was under the impression that SKF itself does not actually short issues, but uses options (specifically oom puts and calls) to track 2X the inverse of the BKX. It's an ETF, though, so it is subject to a premium when demand is high (read: shorting is limited).

Not sure how, but I really like the way it works. I did pretty well using it to offset the risk of USB and JPM in a pseudo market-neutral play earlier in the year.

[Tulpen]

Re: Not trying to predict the market, but...

I was under the impression that SKF itself does not actually short issues, but uses options (specifically oom puts and calls) to track 2X the inverse of the BKX. It's an ETF, though, so it is subject to a premium when demand is high (read: shorting is limited).

Not sure how, but I really like the way it works. I did pretty well using it to offset the risk of USB and JPM in a pseudo market-neutral play earlier in the year.

I think they use mostly swaps instead of options.