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best inverse etf

October has historically been a bad month for the stock market. What we are seeing this month is a bad month compared to recent years when we have had a non-stop bull market. But for momentum traders like us, times like this is when we make the most money. More volatility in the markets means there is more range to capitalize on in both directions.

Trading inverse ETF’s are a great way to profit in market conditions where most people are losing money. But you must understand what inverse ETF’s are and how to trade them, and know which inverse ETFs are the best for trading.  In this article we will discuss some tips for trading inverse ETFs profitably, and what is the best inverse ETF to trade in a bear market. Let’s start by defining what an inverse ETF is:

What are Inverse ETFs?

Inverse ETFs are simple. They are ETF’s that appreciate and depreciate in value according to volatility in the overall market. They are inversely correlated with the US stock market, meaning they increase in value when the Dow and S&P are pulling back, and decrease in value when the overall markets is up-trending.

There are a variety of different inverse ETFs out there. Some are more leveraged than others, and have varying levels of liquidity. Leveraged ETFs are good for day traders, as they are the best instruments to take advantage of short term momentum in the indices. The best inverse ETF in our opinion for day trading is TVIX, but there are several other good alternatives. VXX and UVXY.

Why TVIX

TVIX is the perfect instrument in terms of volatility and range to play during market corrections. It is 2x leveraged. This means that when the market goes down 1%, TVIX will almost always go up 2% or more (usually a lot more). When the SPY dumped from 270 down to 260 on 10/29, TVIX went from about $50 a share to just over $61.

The market made about a 3% move to the downside while TVIX appreciated just over 20%. You can see how much opportunity this presents for us as day traders during market corrections. If you just capture half of the range on TVIX on days like this, you are still making 10% return on your investment in just a few hours. TVIX also has great liquidity, and you can pretty much trade any size you want on it.

TVIX vs UVXY vs VXX

We prefer TVIX to UVXY because it is slightly less volatile. UVXY is a 3x leveraged ETF, which means it has even more range and volatility. When you trade this there are some massive swings in your PNL, and you have to trade with smaller size. VXX is the least volatile out of all of these. TVIX is the perfect balance of volatility and range for my trading style. If you can stomach the bigger swings in UVXY go for it, but I would not recommend trading it if you are new and unfamiliar.  

Live By The Sword, Die By The Sword

The flip side of this is that TVIX and other leveraged inverse ETFs appreciate just as fast. On days when the market has a big push TVIX can easily go down 10%-20% in just a few hours. These are instruments to capitalize on short term momentum in the market, not something to marry. You can see by the daily chart that every time one of these leveraged ETF’s goes on a major run, it fades off over time, since the overall market has been so strong the last 9-10 years. Take your profits into strength. These can quickly reverse on you, so if you don’t take profits into strength these will often reverse on you and turn into a loss.   

Avoid Overnight Holds

TVIX, and other leveraged volatility ETFs, are not something to hold overnight, especially to the longside. Inverse leveraged ETF’s are very volatile, this includes after hours. You will often see huge gaps in either direction every market day, especially during major market corrections like we’re in now. Today (10/31) is a good reason why you should not do overnight holds. TVIX closed at around $52.5, and opened at around $50 a share.

News will often come out outside of market hours affecting the overall market, causing it to make significant moves after hours and premarket. Since these leveraged ETF’s are inversely correlated with the overall market, they will be making huge moves to the up and downside. These swings are not what you want in something you are holding for swing trades. Swinging these will add a ton of stress to your life as you have to monitor your positions afterhours and early during premarket.   

Prices Are Spooky Low: Early Bird Pricing Ends Nov 1st

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About Kunal Desai

Kunal Desai is the Founder and Lead Instructor at Bulls on Wall Street. Since 2008, Kunal has helped thousands of traders reach their trading goals through his unique live trading courses. Kunal is a day trader by day and industry leading instructor by night.

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