FAS and FAZ

I have been fooling lately with the idea of shorting both FAS and FAZ, which are the triple leveraged bull and bear financial ETFs respectively. Over the long-run, this should be a profitable pair trade.

This trade has been commented about numerous times in various market sites but I have yet to find a clear conclusion as to the risks involved.

The risks cited are paying occasional dividends and also a potential massive rally in one direction.

Sufficient capital in your account is therefore needed to act as a buffer so as to not get margin called out.

I am thinking about maybe buying long-term puts in both as an alternative strategy, or buying long-term calls as a hedge to my initial idea.

I have also thought about doing this with USLV and DSLV, the triple leveraged silver ETFs.

Look at the charts below of FAS and FAZ to get a sense of the profit that could have been gained had one shorted both of these back in November 2008.

Weekly Chart

Weekly Chart

I will be trying out some sort of pair trade with triple leveraged ETFs on a virtual account and see how it plays out.