Buying SARK vs Shorting ARKK
First, let's look at SARK:
The Fund is an actively managed exchange-traded fund that attempts to achieve the inverse (-1x) of the return of the ETF for a single day, not for any other period, by entering into a swap agreement on the ETF.
What is a Swap Agreement?
Swaps are financial contracts in which two counterparties agree to exchange or “swap” payments with each other as a result of such things as changes in a stock price, interest rate, or commodity price.
Difference between Swap and Short Selling:
If you short ARKK you need to cover your short position, but buying SARK decreases the possibility of a short-covering rally..!
Short covering is generally responsible for the initial stages of a rally after a prolonged bear market or a protracted decline in a stock or other security.
Education:
Total Return Swaps
A total return swap gives an investor the benefits of owning securities, without actual ownership. A TRS is a contract between a total return payer and total return receiver. The payer usually pays the total return of agreed security to the receiver and receives a fixed/floating rate payment in exchange. The agreed (or referenced) security can be a bond, index, equity, loan, or commodity. The total return will include all generated income and capital appreciation.
Assume Paul (the payer) and Mary (the receiver) enter into a TRS agreement on a bond issued by ABC Inc. If ABC Inc.’s share price rises (capital appreciation) and pays a dividend (income generation) during the swap's duration, Paul will pay Mary those benefits. In return, Mary has to pay Paul a pre-determined fixed/floating rate during the duration.
Benefits: Mary receives a total rate of return (in absolute terms) without owning the security and has the advantage of leverage. She represents a hedge fund or a bank that benefits from the leverage and additional income without owning the security. Paul transfers the credit risk and market risk to Mary, in exchange for a fixed/floating stream of payments. He represents a trader whose long positions can be converted to a short-hedged position while also deferring the loss or gain to the end of swap maturity.
The Bottom Line
Swap contracts can be easily customized to meet the needs of all parties. They offer win-win agreements for participants, including intermediaries like banks that facilitate the transactions. Even so, participants should be aware of potential pitfalls because these contracts are executed over the counter without regulations. (Investopedia)
Example:
Conclusion: SARK could reclaim its previous high in 5 weeks.
Best,
Dr. Moshkelgosha M.D
DISCLAIMER
I’m not a certified financial planner/advisor, a certified financial analyst, an economist, a CPA, an accountant, or a lawyer. I’m not a finance professional through formal education. The contents on this site are for informational purposes only and do not constitute financial, accounting, or legal advice. I can’t promise that the information shared on my posts is appropriate for you or anyone else. By using this site, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information found on this site.
* I have a long position.
Reference article:
https://www.investopedia.com/articles/investing/052915/different-types-swaps.asp
The Fund is an actively managed exchange-traded fund that attempts to achieve the inverse (-1x) of the return of the ETF for a single day, not for any other period, by entering into a swap agreement on the ETF.
What is a Swap Agreement?
Swaps are financial contracts in which two counterparties agree to exchange or “swap” payments with each other as a result of such things as changes in a stock price, interest rate, or commodity price.
Difference between Swap and Short Selling:
If you short ARKK you need to cover your short position, but buying SARK decreases the possibility of a short-covering rally..!
Short covering is generally responsible for the initial stages of a rally after a prolonged bear market or a protracted decline in a stock or other security.
Education:
Total Return Swaps
A total return swap gives an investor the benefits of owning securities, without actual ownership. A TRS is a contract between a total return payer and total return receiver. The payer usually pays the total return of agreed security to the receiver and receives a fixed/floating rate payment in exchange. The agreed (or referenced) security can be a bond, index, equity, loan, or commodity. The total return will include all generated income and capital appreciation.
Assume Paul (the payer) and Mary (the receiver) enter into a TRS agreement on a bond issued by ABC Inc. If ABC Inc.’s share price rises (capital appreciation) and pays a dividend (income generation) during the swap's duration, Paul will pay Mary those benefits. In return, Mary has to pay Paul a pre-determined fixed/floating rate during the duration.
Benefits: Mary receives a total rate of return (in absolute terms) without owning the security and has the advantage of leverage. She represents a hedge fund or a bank that benefits from the leverage and additional income without owning the security. Paul transfers the credit risk and market risk to Mary, in exchange for a fixed/floating stream of payments. He represents a trader whose long positions can be converted to a short-hedged position while also deferring the loss or gain to the end of swap maturity.
The Bottom Line
Swap contracts can be easily customized to meet the needs of all parties. They offer win-win agreements for participants, including intermediaries like banks that facilitate the transactions. Even so, participants should be aware of potential pitfalls because these contracts are executed over the counter without regulations. (Investopedia)
Example:
Conclusion: SARK could reclaim its previous high in 5 weeks.
Best,
Dr. Moshkelgosha M.D
DISCLAIMER
I’m not a certified financial planner/advisor, a certified financial analyst, an economist, a CPA, an accountant, or a lawyer. I’m not a finance professional through formal education. The contents on this site are for informational purposes only and do not constitute financial, accounting, or legal advice. I can’t promise that the information shared on my posts is appropriate for you or anyone else. By using this site, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information found on this site.
* I have a long position.
Reference article:
https://www.investopedia.com/articles/investing/052915/different-types-swaps.asp
Trade closed: target reached