Author: Brendan Ruchert-Dixon
Model: Alpha Trapper
Disclosure: Short AGQ, ZSL
April turned out to be a good month for the stock market. Alpha Trapper caught some of the gains but came under pressure late in the month because of rising commodity prices, including those for silver, oil, and natural gas.
The model took a bearish position on silver near the end of the day on April 19. I sold short both the 2x and inverse 2x ETFs (NYSE: AGQ) (NYSE: ZSL), with the short position in AGQ (the bullish one) being a few times larger than the position in ZSL.
My position is net-short because as of the last month silver is showing classic signs of a bubble. The recent price and volume increase have been feeding on themselves, generating further interest and price increases. I don’t know exactly how high it will go, and the model may show some increased volatility as I hold on and wait for the correction, but I am confident it won’t rise indefinitely. The dollar may be weakening, but this is not Armageddon.
I made the trade with the pair of leveraged ETFs so that the model can also benefit from the increased volatility in silver, both on the upside and downside. For every large daily price swing, the target price range (inside which the paired short trade is profitable) should widen.
A few articles were recently posted on the Covestor blog explaining more on why leveraged ETFs can underperform. View them here.
