Hey Bond Geeks - Analyze This! (seriously)

Sorry about the jab guys, but I need some people with sharper pencils than me right now.

McQ’s Folly (cause I’d like something named after me)
December 28, 2007. The dumbest trader on the planet (we’ll call him me) goes out and buys $10,000 worth of Proshares Ultra QQQ (QLD) AND $10,000 Proshares Ultrashort QQQ (QID). So I’ve bought equal and opposite investment vehicles, right? To make matters worse, I buy each at the highest price of the day. 32 trading days later, (February 15, 2008 ) I close both positions, each at their lowest price of the day. So, I’ve engaged in a zero sum game (minus expenses) with worst-case scenario execution. How much did this hypothetical exercise in stupidity cost me?

I actually would have made $298 (minus trading costs) or 1.49%. If you’re thinking WTF? right now, welcome to my world.

Here’s the actual numbers used :
http://finance.yahoo.com/q/hp?s=QLD
http://finance.yahoo.com/q/hp?s=QID

QLD
12/28/07 High - $102.70
$10,000 rounded to nearest whole number of shares – 97
Cost = $ 9,961.90 (97 * $102.70)
02/15/08 LOW - $70.12
Proceeds = $ 6,801.64 (97 * 70.12)
Loss = $(3,160.26) or –31.72%


QID
12/28/07 High - $37.70
$10,000 rounded to nearest whole number of shares – 265
Cost = $9990.50 (265 * $37.70)
02/15/08 LOW - $50.75
Proceeds = $13448.75 (265 * $50.75)
Gain = $3,458.25 or 34.62%


Total cost: $19,952.40
Total proceeds: $20,250.39
Gain: $297.99 or 1.49%

Not what I would have expected, but here we are.


Background
With no football, I’ve been spending too much time thinking about market direction, and I like the concept of the Proshares Ultra-ETF’s, although I must admit their methods are mysterious to me. Anyway, doubling your returns (minus expenses) opens up great opportunities for bulls, bears and hedgers. I found myself focusing in on the expenses, because they are “baked in” to the prices and spreads (also mysterious). So I thought, “short them both and profit from the price erosion the expenses cause”. Put on coffee, download data to excel, one more Saturday night.

The data I used went back to July 2006. At first, it seemed somewhat promising with a likely return of 10% on a double-short held for a year. Honestly, that’s probably not enough to get me to bite, unless it was pretty much a lock. As we moved into the fall (early October to be exact), double-short thesis really started to fall apart. Interestingly, this was a couple weeks before the Nasdaq-100 peaked.

The December 28 example sited above is an extreme, but not isolated illustration of how well a double-long position (even a horrendously executed one) could work. 1.5% every seven weeks risk free may not be the Comstock Lode, but it wouldn’t hurt. Which brings us to the questions of repeatability and honest risk assessment. Which is kind of like asking me to explain the warping of time and space.

The Conundrum
I don’t understand what I’m looking at here. I’m pretty sure my arithmetic is correct. Is this something trade worthy (especially with a little intelligence sprinkled in) or an anomalous condition, unlikely to repeat again anytime soon? Could it be an indicator? Could I have a Nobel Prize, too? Arbitrage isn’t in my vocabulary.

Which brings me to the bond guys, who torture numbers just for kicks. Maybe somebody can explain this to a mathematically-challenged pseudo-colleague. Don’t forget to Elmo it up for the rest of us.

Superfluous Bond tickers
To attract unsuspecting mathemagicians…...
AGG, IEF, IEI, SHV, GVI, GBF, CFT, CIU, TLT, SHY

Author's note: This article was rejected by seekingalpha.com 2/18/2008.