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Education Series: Single-Stock ETPs

How SHORT ETPs Preserve Your Tesla Portfolio Value

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Given that many leading U.S. stocks are heavily overvalued in terms of earnings and sales ratios, they have remained quite vulnerable to volatility in recent times. This is a problem for investor-favourite Tesla; the stock has seen many dramatic falls and rises over the course of the year so far.

Hedging for volatility is a challenge but not impossible. For example, instruments such as the -3X Short Tesla ETP (Ticker: TS3S, ISIN: XS2337090265) can help do this in the current bearish market.

Value Preservation Strategies: Two Examples

To highlight the inherent potential, let’s consider two distinct price scenarios. Please note that we shall be using reported closing prices – which are publicly available – for all the instruments.

The first one: let’s assume that an investor has $8 million in 6,667 Tesla stocks as of the January 3rd this year. The stock market has been going through a jagged downturn for some time by then. Let’s assume that the same investor goes on to buy $2 million in TS3S on the same day to hedge for this scenario. Given that TS3S is only 0.02% of the cost of the stock, this amounts to 7,692,307 ETPs.

Over the course of the next eight days, the stock goes on to slide nearly 8%. However, TS3S witnesses a strong rise in price.

The investor’s total portfolio experiences only a net 0.1% downturn in value over this period: while the stock component goes down by nearly 8%, the insurance – the TS3S component – increases by over 19%.

The next scenario: let’s assume that an investor has $8 million in 8,590 Tesla stocks as of the February 2nd this year. While the stock closed out the previous month with a 11% day-on-day increase, the investor considers it prudent to invest $2 million in TS3S on the same day to hedge for the volatility witnessed in the past month and anticipated in the next few days. Given that TS3S now costs 0.05% of the stock price, this amounts to 4,651,162 ETPs.

The investor’s foresight turns out to be well-founded: over the next 9 days, the stock loses nearly 8% in value while TS3S grows in price.

The investor’s total portfolio experiences nearly a net 2% downturn in value over this period: while the stock component goes down by nearly 8%, the insurance – the TS3S component – increases by nearly 21%.

Volatility Drives Impact

ETPs deliver leveraged returns in the daily-compounded format. This underlines the differences in performance in the two scenarios, despite nearly-identical downturn over the highlighted periods. In the first scenario, the stock price experienced a precipitous fall over a number followed by a mild recovery. In the second scenario, the stock price fluctuated around before taking a hard dive.

As we had highlighted in an earlier article, when it comes to leveraged ETPs, “the trend is your friend”. While the strong trend in downturn enabled the composite portfolio to nearly remain at par by the end of the first scenario, the jagged price trajectory in the second scenario ensured both stock and ETP components meandered around par until the very end where the ETP component stepped in to deliver some value recovery. In both cases, value preservation was a strong theme in the total portfolio. Using ETPs as a hedging strategy – as opposed to traditional derivatives such as options and futures – might seem radical but is certainly a viable option. ETPs also generally tend to have lower costs in general when compared to derivative premiums.

Leverage Shares (the issuer whose ETPs were used to illustrate the aforementioned strategies) has recently announced that the Arranger Fee on its “Short” Tesla ETPs will drop to 0% from the end of March. The fee has been stated to remain at 0% for at least 6 months until the end of September, after which a further extension on the “fee holiday” might be considered.

While there are a number of ETP issuers in the market that offer exposure to Tesla’s performance, none of them are currently offering a fee holiday. While ETP fees typically aren’t a significant factor in most cases, the fee savings is money on the table while implementing a hedging strategy for a stock as important as Tesla.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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A quick study on the effects of market behaviour on the returns of a 3X ETP vs a 2X ETP.
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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Senior Analyst

Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Director

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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