Volatility, hedging etc. with HVU

tsx oct 13 2015hvu oct 13 2015

On the left we have the TSX as usual. On the right the Horizon’s Betapro S&P 500 Short-term Futures Bull Plus ETF TSE. You will have to look it up but it is leveraged, hedged back to Can. dollars and measures volatility. is nowadays used as a proxy for risk the underlying assumption being that as risk rises, so does volatility. The idea is that you do not need fire insurance if somehow you could find a vehicle that measures the temperature of your house at that critical point in time.

In this example the TSX moved about 2000 points between Aug. 10 and Aug 24. That is , roughly, 14 %. Starting on the same day but lasting a few days longer the etf increased by about 70 points or about 250 to 300%. Ergo the HVU, in this example at least, moves about 20x what the TSE does. This ratio is obviously not fixed as it will depend on the relative speeds at which the TSX drops and the HVU climbs but nevertheless one can “hedge” risk by buying the HVU, perhaps at a nominal ratio of 1 to 5 or so. The trick is to do that at the right time as the gains are explosive and they evaporate quickly. My guess is that the HVU at between 40 and 35 would represent a good time. Remember that we do not give investment advice so talk to your broker.