Improving Costs Basis with ProShares UltraShort QQQ (ETF) (NYSEARCA:QID), and ProShares Ultra QQQ (ETF) (NYSEARCA:QLD)

We have all heard of CAGR (Compound Annual Growth Rates), some of us even talk about CMGR (Compound Monthly Growth Rates), but in our LETS Strategy we have the ability to realize CGRS (Compound Growth Rate per Swap), and it is that I will discuss in his article.

CRGS makes CAGR look prehistoric.  Reasonably, we may make 1-2 swaps per week, and that means we have exponentially more opportunities to realize compounding than the 1-year folks.  In turn, this gives us the ability to improve performance accordingly, but it is all based on the CBIT that we use.

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CBIT stands for Cost Basis Improvement Technique, but it is not traditional.  It is not going to reduce your cost basis for tax purposes, but it will for trading purposes.  Our CBIT involves three instruments: CASH, ProShares UltraShort QQQ (ETF) (NYSEARCA:QID), and ProShares Ultra QQQ (ETF) (NYSEARCA:QLD).  Depending on which market we are trading the ETFs may change, but they are always 2x ETFs and they are always inverse of each other.  The key characteristic is that when one increases by 1%, the other declines by 1%, proportionally, and that opens the door for efficient swapping and implementation of CBITs, and in doing so we can compound our return potential. 

Here is how it works:

To make the math easy, assume that QID is $30 and QLD is $70.  With this, $0.70 is about 1% of QLD, and if QLD increases by 1% QID is structured so it declines proportionally by about 1%.  This is especially true on an intraday basis, and that is where our CBIT comes into play.

If we hold QID and we are looking to improve cost basis in QID we would do the following:

  1. Sell QID and expect a modest decline
  2. Buy QLD and expect a modest increase
  3. Once QLD increases modestly we would swap back into QID

Instead of 1% though, let’s use 0.5%, or $0.35 in QLD, because that is easier.  This 2x ETF moves more than that on a daily basis almost every day, and although swapping that actively is highly discouraged, it certainly suggests that opportunities to use CBIT exist regularly. 

If our objective was to better our position by 1% in QID we could swap as noted above, we would make 0.5% from QLD, and when we went to buy back QID we could do it 0.5% cheaper, that a 1% betterment, but there’s more.  We can also buy back more shares, and that’s a bonus, and we can buy back more shares every time we did that!

If QID goes back to just where it was when we started the swap we would be making 1% while everyone else is just getting back to even and that’s a big deal.  If you find that hard to appreciate, extrapolate this over a year, 52 weeks, and assume that all you did was improve cost basis by 1% per week.  You would have a 52% CBI.  The Market could also go down by 26% before you lost money.  That is huge, very defensive, and defense wins championships, but it does something else too.

A Good Defense Promotes Good offense.

Absolutely, the CBIT approach we use in our LETS Strategy has a defensive mindset, but by improving our basis consistently we put ourselves in a position to realize positive results when everyone else who may have initiated the same trade in QID at the same time may simply be getting back to even.

And then, of course, when we add in the CGRS as noted at the top, it is easy to realize that we can do it with many more shares than we originally bought.  Once the market moves in our favor (if it does), that will become very meaningful.  There’s no guarantee it will of course.

For More information on our LETS Strategy, CBIT, and for real life examples, please visit watch his short informative video:  LETS VIDEO

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