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For example, today SPY decreased -3.17% and therefore the 3x Bear SPY ETF, SPXS, increased 9.85% - roughly equivalent to 300% inverse (310%).

What if you somehow foresaw the decrease early in the morning, and wanted to load up on SPXS, would the price still represent roughly -300% if you purchased a large notational value (equal to more than 25% average daily notational volume).

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    I'm not really sure what you're asking but I think that you meant notional value rather than notational value, eh? On days like today, the leveraged ETFs tend to outperform their X times because the derivatives often expand in value as well as increase in value (for example, the implied volatility of long options).
    – Bob Baerker
    Commented Oct 10, 2018 at 22:55

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SPXS is not a particularly liquid or highly traded ETF. Trading 25% of ADV (~700,000 shares or ~17 million dollars) will likely be very expensive unless done carefully. It depends a lot on how you trade, but without trading skillfully you could lose 1/2-2% on the buy and 1/2-2% on the sell pretty easily. This could cut the 9.85% gain nearly in half.

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To add to it, during these times brokers will alter marginal requirements. For instance, VXX sometimes during the year allows 3-4x leverage for day traders and others times less than 1x your equity (70% of your total equity) for active traders.

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ETFs can trade at a premium to NAV. It is possible that a large order would cause the price of an ETF to increase relative to the underlying securities.

However, if the securities inside the ETF are liquid, market makers will often try to buy the underlying securities and short the ETF to capture the premium. This helps keep the premium for most ETFs small. If the ETF is difficult to short or the underlying securities are illiquid, the premium can be larger.

This is not a recommendation to buy or sell securities, it is only for educational purposes.

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    In this case, the OP is discussing a negative-delta ETF, so buying the ETF is effectively shorting the underlying. So if the ETF is selling at a premium, arbitrage would come from shorting both the ETF and the underlying.
    – Acccumulation
    Commented Oct 17, 2018 at 18:39

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