Trade Alert – (SDS) Update – January 12, 2012

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Buy the leveraged short S&P 500 ETF (SDS) at $18.18 or best

Opening Trade

1-11-2012

Portfolio weighting: 10%

($10,000/$18.18) = 550 shares

I am going to use the modest rally this morning to open a small position in the leveraged short S&P 500 ETF (SDS) at $18.18. Much of the logic for going into this trade now was detailed in my earlier trade alert for the S&P 500 ETF (SPY) March $126 Puts. So here I will only address the advantages of the (SDS) ETF.

This ETF is not cheap to run for the long term, with an annual cost of carry of around 5%. You get this by adding the 2% S&P 500 dividend yield which you are short, times two for the leverage, and add in 1% for the management, administration, and custody fees.

But that beats the hell out of the short dated options, which with accelerated time decay, you are constantly running against the clock. And if you expire out of the money, you suffer a 100% capital loss. I also understand that many readers are unable to trade options for regulatory or other reasons. This ETF gives them a good alternative.

If the S&P 500 goes back and retests the 2011 lows, which I think will happen, then the (SDS) rises from $18.18 to $36, a gain of nearly 100%. Get any piece of this, and you have had a decent year, even with just a 10% weighting in your portfolio.

In case the great bull market of 2012 unleashes, I’m going to keep a stop loss on this position of $16. But I’m betting that is not going to happen.