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There is some (unexpected to me) behaviour in a stock which led to me losing quite a bit of money and I would like to understand what is happening.

The stock in question is GraniteShares 3x Short Rolls-Royce Daily ETP (3SRR).

My understanding and expectation is that it would go up when the underlying stock (Rolls-Royce) goes down and down when the underlying goes up.

Here is a screenshot of the underlying's performance today from Yahoo! Finance: Yahoo! Finance Screenshot showing Rolls-Royce stock down by 60%

And here is a screenshot of 3SRR's performance today from Yahoo! Finance: Yahoo! Finance screenshot showing 3SRR stock down by 73%

I am guessing this is related to the Rolls-Royce rights issue. Indeed GraniteShares have posted an article about this so it probably is expected but I don't fully understand what's happening here. So I'd like to understand a few things:

  1. Why is 3SRR going down instead of up when the underlying is going down?
  2. Why is 3LRR going up by only 38% when 3SRR went down by 73%? I would expect it to be up by much more.
  3. The price went from about 60p down to about 28p, then within a short time up to about 50p and even quicker down to 16p. Is this simply due to trading activity or something else?
Vlad Schnakovszki
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2 Answers2

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A large decline in the RR share price (as of the open of trading on 28 October 2020) was universally expected because the stock was going ex-rights. This reflects that those who owned the stock at the close of trading on 27 October would receive a substantial payout not received by anyone who bought the stock starting 28 October.

Thus, the total return on RR stock did not suffer the large loss seen in the stock price alone. The breakeven point -- the RR share price on 28 October that would compensate the large payout -- was about 75p. In fact, the stock rallied well above this level, reflecting a total return on the day of about +13%. Thus, it is not surprising that 3LRR returned +38%.

Meanwhile, the story of 3SRR is more complex. At its highest point of the day on 28 October, RR rallied 34% above the breakeven point. At 3x leverage, this would normally lead to a loss of more than 100%, bankrupting 3SRR (similar to an individual investor getting a margin call). However, the sponsor used a "stop loss mechanism" to salvage some value and keep 3SRR from going to zero. In a way, you were lucky to lose "only" 73%.

The bottom line is that, even apart from the rights complication, RR was very volatile that day and the 3x leveraged ETPs were very risky as a result.

nanoman
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My limited understanding from similar short ETPs is that they track intraday, ie within one single day, because they rebalance every new day. The -60.99% that you see there is from the previous day's close (219), but your ETP tracks the difference between today's open and today's close. The stock opened at 77 and closed at 85, so since this goes up, your ETP goes down 3 times that.

By the way, read about the compound effect of these ETPs to avoid losing more.

spiros
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