Who's good with leveraged instruments?

I’m just trying to figure out how a 3x long and 3x short instrument can both be -2%

I’m thinking something should have been green :man_shrugging: :sweat_smile:

In fact physical silver was up very slightly today.

Yet we have long:

And we have short:

And physical was up :thinking:

WisdomTree Physical Silver is designed to offer security holders a simple and cost-
efficient way to access the silver market by providing a return equivalent to the
movements in the silver spot price less the applicable management fee.

So is it just the fees?

WisdomTree Silver 3x Daily Leveraged is a fully collateralised ETC. The ETC provides a total return comprised of three times the daily performance of the NASDAQ Commodity Silver ER index, plus the interest revenue earned on the collateralised amount.
For example, if the index rises by 1% over a day, then the ETC will rise by 3%, excluding fees. However if the index falls by 1% over a day, then the ETC will fall by 3%, excluding fees.

WisdomTree Silver 3x Daily Short is a fully collateralised ETC. The ETC provides a total return comprised of three times the inverse daily performance of the NASDAQ Commodity Silver ER index, plus the interest revenue earned on the collateralised amount.
For example, if the index rises by 1% over a day, then the ETC will fall by 3%, excluding fees. However if the index falls by 1% over a day, then the ETC will rise by 3%, excluding fees.

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It does not make any sense to me…

I tried and following the action was maddening. It wasn’t NASDAQ Commodity Silver ER as that wasn’t moving, it was similar to watching XAG/USD but did its own thing. I know it’s meant to be 3x but the movement was erratic. I assume there must be an algorithm to generate it :man_shrugging:

What I don’t understand via the main SLVR one doesn’t use that index it’s Bloomberg Silver Subindex (the “Index”) when you would expect the same for x1, x2 and x3

I assume there’s a built-in stop loss function on the short but from the granite tales on RR it puts me off

I’ve recently been buying 3 x apple since you can’t even go long on apple CFDs anymore lol, and like you, I’ve noticed it’s not as straight forward as it suggests. I haven’t figured out exactly how it screws us yet and I’ll admit I skipped learning about these as I thought knowing CFDs and knowing apple would be enough. Obviously the 3 x apple is going up so it’s no big deal but there’s more to the mechanics than meets the eye.

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Jake, CFDs are expensive, but these are no free lunch!

The problem with the 2 and 3 times instruments is that because the percentage change is calculated and reset on a daily basis with high volatility but no real change can be expensive. Because of the maths the 3x ETF will waste value with market volatility.

Example underlying falls then rises

Underlying security

Day 1: open 100 -10% = close 90, Day 2: open 90 – 11.1111% = close 80 Day 3: open 80 + 25% = close 100

Instrument 3X

Day 1: 100 – 10% * 3 is 30%= close 70, Day 2: open 70 – 11.1111% *3 is -33.3333% = 46.667, close 46.667 Day 3: open 46.667 + 25% * 3 is 75% and 175% of 31.11 is only 81.667, close 81.667

Example underlying rises then falls

Underlying security

Day 1: open 100 + 25% close 125, Day 2: open 125 – 20% close 100

Instrument 3X

Day 1: open 100 + 25% * 3 is 75% = 175, close 175 Day 2: open 175 – 20% * 3 is - 60% = 70, close 70.

Of course the above is an extreme example, but on something like Gamestop a 3x ETF would soon be worthless.

If any one disagrees with the above please show where I went wrong.

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Daily performance, not cumulative performance.

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and I would like to summon the wise one @Oktay once again

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Any idea how that instrument calculates it’s movement during the 8am-4:30pm (UK) time based on a US timezone. It doesn’t appear to be based on the session that was before the UK session? It clearly says NASDAQ Commodity Silver ER :man_shrugging:

And how could it have been red on all the short and long positions on the same day? @Rumen @David :man_shrugging:

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I think @Oktay is able to explain how leveraged instruments work.
I just know there are 2 types: synthetic(the ones GranitShare uses based on swap contracts) and normal(as Leveraged Shares uses with margin). Not sure about WisdomTree.

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Haha @Etypsyno @Rygel - thanks for the tag! :slight_smile:

So let’s try to break this up into a few parts.

1. Price vs NAV

  • The price is what you see on the app and what you pay to buy the product. For all ETPs (which includes ETFs, ETNs, and ETCs) - the pricing is done by an independent market maker (like Virtu, Winterflood, BNP Paribas, etc.). The company that makes the ETPs is not involved in the intraday pricing (there would be a conflict of interest).

  • The NAV is simply a calculation: For example, if the underlying gains 2%, the 3x ETP should gain about 6% (slightly less due to fees). For example, I see on Wisdomtree’s site, the 3x short was +7.24% while the 3x long -7.25%. on Feb 5th.

2. What keeps the Price close to its NAV?

One word: arbitrage. These are “open-ended products”, meaning more can be made available to for trading if there’s demand or existing shares can be removed from the market. This is done via creations/redemptions by the market makers (I can share more about this if needed).

So anytime there’s a significant difference between the Price and NAV, the market maker can buy the underlying product and exchange them for the ETPs or vice versa. This is in their interest because they make money from this - and this helps keep the two in line.

3. Can the Price of both the long and short be positive / negative?

Yes. I know this sounds strange, but it’s possible - although quite rare. This should only happen if the underlying is very volatile (so market makers briefly widen the spread on both products) or if there is so much buying/selling of one of the ETPs that it actually pushes the % change to match the other ETP. Once again, definitely rare.

4. How can the ETP track the underlying if the underlying’s market is closed?

Even if the underlying market hasn’t opened, there’s a good chance the instruments still trade somewhere.

  • For commodities: The futures market (like for silver) is open almost 24/7. So the price of the ETPs should be in line with those.

  • For single stocks/ETFs: The ETPs track the underlying using after-hours trading, pre-market trading, based on news that happen overnight, etc. A good way to check how they’re doing is to see if they move in line with the GDR (like for Tesla and Apple, which trade in Germany). The moves should be in lockstep.

I know it’s a bit long, but hope this helps! :wink:

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@Oktay can you please also explain in simple terms, (so us mortals can understand :smile:) the differences between GranitShare, LS and WisdomTree leveraged instruments.
Thank you.

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No, I suggest you ask the issuer. I could be like other ETFs where in the very short term - hours it is supply and demand and when the price gets too far from the underlying say 2 or 3% authorised participants will exchange the ETF for the underlying asset. If the EFT is priced higher than the underlying the authorised participants will simultaneously sell the EFT and buy the underlying. This will cause the EFT price to fall and the underlying to increase until the arbitrage gap becomes too small for the authorised participants to make a profit.
It does not make sense for both the long and short ETFs to red at the same time. They should be almost mirror images of each other in terms of price movements. You should ask the ETF provided how this happen, as it looks like heads you loose and tails you loose.

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Sure, let me give it a try @Rygel :slight_smile:

  • WisdomTree: They have leveraged ETPs across multiple asset classes like commodities, indices, fixed income, etc. - and with multiple leverage factors. Nothing on single stocks. From what I was able to find, they are swap-based (synthetic), meaning the ETP issuer basically enters into an agreement with a counterparty (usually a major bank) where the bank agrees to provide the leveraged return of the underlying for a fee.

  • GraniteShares: Their ETPs are structured in a similar way to WisdomTree’s (synthetic), but they offer ETPs on single stocks (some UK and some US names). Also, the leverage factors offered are +3x and -3x and are traded in $.

  • Leverage Shares: The ETPs are also on single stocks (for now :wink: ) and track mainly US names and a few Asian ones. They are physically backed. Put simply, this means that for every $100K of 2x Apple ETP issued, the company purchases 200K worth of actual Apple stock to be held as collateral. Leverage factors offered are -1x, +2x and +3x and trade in £, € and .

That said, swap-based (synthetic) ETPs still have very strict collateral requirements, meaning they need to have cash or other liquid holdings to make sure the ETPs are backed (in case something happens to their counterparty or to the issuer itself).

Hope this clarifies a few questions. Feel free to reach out if anything is unclear - I’m more than happy to help (if I can, of course)!

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Thanks @Oktay and @Broker

So the Wisdomtree says it specifically tracks the NQCISIER which is appears be only a four hour session each day. Only two hours of which cross over UK time. When you said it tracks others outside this time for movement, shouldn’t they explicitly name what it uses for 8:00-2:30pm?

What’s happening at these points? 2.5 hr of being the same value?

Im still baffled by how a green day for silver could result in a 3x long being as red as 3x short.

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Hmm… it does look strange. Even tick by tick on the 3SIL and 3SIS seem to be correlated instead of moving opposite directions based on your screenshots.

I think they have the same instruments (both 3SIL and 3SIS) trading on multiple exchanges (LSE, Borsa Italiana, Xetra). The chart you’re looking at may not be updating as quick b/c it’s the LSE-listed one.

Based on the intraday moves, here’s what I see (from Tradingview).

For example, if I check 3SIL and 3SIS (Italian listings) - they seem to be moving as expected:

And on the LSE listings of the same tickers, the opposite correlation doesn’t seem as strong:

Since you are trading the LSE listings on the app, my assumption would be just that the tickers aren’t being updated as quickly due to less volume compared to the other listings. Overall however, the daily gains/losses should be the same. Unfortunately for more info you’d probably have to ask WisdomTree directly.

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Thanks for your input and knowledge. I’ve spoken with WisdomTree who have said it should have been green that day.

So @David any idea how all the long and short leveraged positions were pulling in red - Can you throw that back to Bloomberg to also look into? Feb 3.

As you’ll see by my account it cost me significantly having the wrong data displayed.

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Hi Guys,

Very well done explanation by @Oktay about Leveraged ETP.
GraniteShares have created an education section with videos on their website to cover everything a Trader must know before buying Leveraged ETP.
https://www.graniteshares.com/institutional/uk/en-uk/education/

We did also an article saying what Oktay explained about ETN, ETC etc… with more details and a full explanation about risks:

The first thing to do when you see something like that… is to check the “Value per ETP” published on the website of the issuer after market hours (previous day). It will allow you to identify quickly if there is a price issue.

Yeah I made contact with them and have established it was a green day.

Both the 3x long and 3x short shouldn’t have been showing both a 2% loss.

The problem I have is T212 haven’t bothered to acknowledge me.

So Instead of seeing a profit and selling out, I held and it dropped the next day (significantly).

I know T212 will point the finger and say well we just pull through Bloombergs data.

@MarcRAFFARD

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