A.I.M. Users Bulletin Board

[ls7550]

Re : Ultra's

Having burnt my own digits with these I'm not much interested in trying again. AIM loved the upside but couldn't get a grip on the downside.

Not sure you're looking at it the same way as me Tom. Yes as a straight AIM it doesn't look that good for Ultra's. It would appear that the twice scaled based Ultra (SSO) doesn't actually provide twice the longer term benefit as many expect, instead the daily price motions are just doubled whilst longer term average gains tend to align with the underline non-scaled S&P.

A 10% fall requires a subsequent 11.1% gain to get back to break-even. The SSO just scales the daily down/up price motions. However a 20% fall followed by a 22.2% gain (twice the underline 10% and 11.1% motions) doesn't get back to break-even levels, instead a 25% gain is required. So over a series of such down's and up's that drag tends to scale the Ultra to just pace the underline and doesn't provide twice the overall longer term upside benefit.

Taking the opposite stance however there would appear to be an edge, a potential profit bias to some extent. A 20% long based fall from say 100 down to 80 followed by a 22.2% rise lifts the price back to 97.76 instead of 100, the shorter of the Ultra-Long is 2.24% in profit across that cycle. If in the longer term the Ultra-Long just paces the underline instead of being twice the gain, then that implies the shorter benefits by that differential, or around the same as the Index gain.

If we assume that the Index will at some future date be say 20% higher, a most likely event, then the Ultra-Long might equally just be 20% in profit. Had we shorted that Ultra then we'd be 20% down (not 40% down due to the above mentioned reasons). Had we also taken out a conventional (non-leveraged) Index Long we would be 20% up - overall neutrality. Adjusting to instead allocate 1 part to the short Ultra-Long coupled with 2 parts to a conventional unleveraged Index Long results in an overall profit. The short Ultra-Long would be 0.33 * 20% down relative to the Index Long's 0.66 * 20% gain. Overall a 6.6% benefit compared to the 20% gain of a 100% Index Long position BUT ! during the interim run up period to that 20% higher price level our overall combined allotted funds shorter term volatility levels would be significantly lower - potentially near 0% levels. Better still, if we AIM'd the individuals then as one was selling the other would be buying and visa-versa. A form of hedge fund based on AIM.

Say for example on day 1 the index rises 15% then a 1 part short Ultra-Long coupled with a 2 part Index Long would be neutral overall. AIM might however signal to sell part of the 2-part-index-long and buy part of the 1-part-short-Ultra-Long, with both trades of around equal $ amounts, after which the price might reverse back down to perhaps 10% below the start date price level and AIM issues opposite signals.....

All a bit mind numbing that I haven't fully thought through as of yet - and I haven't got my head around maybe using the Ultra-Short instead of a short of the Ultra-Long either. Hopefully however I might have rekindled your interest in potentially considering Ultra's further.

Best Regards. Clive.