New answers tagged rebalancing
1
As @Lliane explains, you are actually describing a position in which the underlying is rebalanced everyday, hence the compounding effect of the leveraged ETF vanishes.
Maybe a bit of modelling can be helpful to illustrate the relationship between leveraged ETFs and volatility. Let $S_t$ be the value of the underlying and $V_t$ the value of a leveraged ETF ...
1
I disagree that these products are convex*.
At any point in time, the ETF exposure to the underlying is linear, it's just that it changes through time. A 2x ETF will just have 2x exposure to the underlying - where the exposure is based on the nav at the point of rebalancing.
Say the nav is \$100 per share, then it will hold \$200 of exposure to the ...
2
Both products actually have positive convexity, they will buy more underlying (SP500) when the price goes up and sell it when it goes down.
However, if you hedge every day, you will just cancel out that gamma convexity.
You have to let the position run a few days if you want to trade the gamma, because it is generated by the daily hedging of the 3x etf, not ...
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