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.
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 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 joined Leverage Shares in 2018 as part of the company’s primary 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 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 Leverage Shares 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.
Terms and Conditions
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.