It is nowhere near ready to crash yet, because there are still too many guy like us ready to short it. We all need to give up first.

Look at the charts in this old post that show how long yields stayed ridiculously low while inflation raged in the 1940s:

http://sovereignspeculator.com/2008/08/08/that-crazy-crazy-bond-market-a-call-for-sub-3-long-bonds/

No. Long ETFs are just typically just baskets of stocks like index funds, though there may be some unusual ones that aim to track things like oil futures that behave in strange manners. IYR and XLF and SPY and GLD and such just own securities or metal and move with the prices of those assets.

With options, volatility increases the premium, so when the VIX is high, it is harder to buy puts cheaply. Ideally, you want to buy when the VIX is low (like Spring 07) and sell when it is high (like Oct-Nov 08).

Thanks for including the ETF math example again. It’s kind of unnerving to watch this volatility play out with these inverse ETF’s. Your initial warning about them was timely.

Does volatility work against you when you are going long with an ETF in the same way it does with the inverse ETF’s?

Also, when you are using a LEAPS put option, on say IYR, is the potential volatility of IYR a concern at all (other than delaying the move toward your strike price)? Or, are you now “out of your own way,” as you once put it?

“Brutal math

The main problem with short ETFs is that as the underlying indexes get lower, small dollar moves become large percentages, especially in 2X funds. This math works against you as the market exhibits volatility on its way down. A dollar of loss in an index wins you a smaller gain in your short fund than a dollar of gain in the index from that lower level gives you a loss in your fund. Here’s an illustration:

Imagine if XLF (a financial index ETF) goes from 20 to 19 one day, and SKF (SKF’s 2X inverse) goes from 100 to 110.

$1 out of $20 is 5%, so SKF goes up 10%

$1 down = $10 up

The next day XLF goes from 19 to 20, so SKF goes to $98.42 . $1 out of $19 is 5.26%, so SKF goes down $11.58.

XLF is back where it started, but SKF is down 1.42%.

As many have learned in the bounce from the July 15 lows, this math can be brutal with larger percentage swings, and these moves will only get wilder as the market goes lower.”

http://sovereignspeculator.com/2008/08/08/inverse-etfs-vs-leaps-puts/

You can run any scenario through in your head if you remember that the inverse ETFs deliver an inverse of each DAY’s return in the index.

To use them successfully, you need to time the market just right on a relatively short-term basis — you need to own them only when the market is moving your way on a steady streak. Since this is very tough, I greatly prefer options.