This reminded me of my feeble attempt to short the S&P 500 (in a very, very, VERY small way) between 2006-2008. It wasn't pretty.
(Note: Before you read on, please note my disclaimer on the sidebar.)
Why I Attempted to Short the Market
In 2006, I witnessed my SPDR S&P500 ETF (ticker: SPY) that I purchased in October 2001 go up, up and up. I was initially bummed that I didn't buy more between 2001-2003 when it was significantly cheaper.
Eventually, I became worried because I started seeing parallels and similarities (albeit superficial) with existing market conditions and conditions that led to the Great Depression: a President adverse to economic regulations (then Hoover, now Bush), yawning trade gaps, a seemingly endless stock-market boom, cheap money, and over-expansion of credit (then farms, now housing).
The ProFunds family of exchange-traded funds created a bunch of inverse ETFs that target individual economic sectors and broader categories in both the U.S. and abroad. ProShares Ultra Short S&P500 ETF (ticker: SDS) is designed to go up 2% for every 1% the S&P 500 average goes down.
In November 2006, I purchased 3 shares of SDS at $60.50/share (total ACB: $191.49 including $9.99 trading fee). I limited my investment to $200 since I was wary of the concept of “shorting”. I also couldn’t afford more. (He he.)
After I purchased SDS, I watched its value plummet all the way to $48.40/share in October 2007. At the time, I was prepared to lose it all and was relieved I only experimented with $200. But as you are all painfully aware, the market turned in October 2007 and the value of SDS started climbing.
I knew after trading fees were taken into consideration, my break-even price was $67.16/share. For reasons none other than wanting to make a small profit, I placed a limit order of $75/share.
Early 2008, SDS hit a little over $71/share (i.e., above my “break even” selling price) twice, but started going down again. I thought I missed my opportunity to break even and set my target price to $71/ share and later to $70/share.
I guess although I worried about a market crash, I never believed a serious one would materialize. And in my defense, clearly none of the so-called experts on CNBC did either. (Oh... how hindsight is 20-20....)
On 7/7/08, I sold SDS for $70/share.
SDS closed at $97.21/share yesterday. Gaaaaaaaa!!!!
What was my net profit on my $200 investment over a 21-month period?
$8.67 in dividends and a net sale of $8.52 for a net profit of $17.19 (or an equivalent return of 5% APY).
Lessons I’ve Learned
I think what I'll do now is to take use the proceeds of my SDS sale and plunk it into SPY. Theoretically, when I turn a profit on SPY, I can use the proceeds to purchase SDS in the future. Or am I being too simplistic here? :-D