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How to Trade Options on Leveraged ETFs

Before I start with how to trade Leveraged ETF options, let me remind you that I believe we are at the start of an etf creation bubble, in which retail investors are getting exposure to financial instruments that they don’t need– the capital base is not large enough to warrant that sort of exposure (Case Shiller ETF??). Also, many of these etfs have structural issues that cause them to consistently underperform the instrument they claim to track — see USO and UNG for examples.

But there are some advantages with trading leveraged options. First, let’s take a look at the downside:

Leveraged ETFs go through a daily rebalancing, and that causes them to underperform over time just from their mathematical calculations. Unless there is a strong trend in price and volatlity, it is very difficult for these instruments to outperform in the intermediate term. The problem was so bad that Direxion did a reverse split in FAZ/FAS to encourage trading again.   –more

The original video of this part (1) was taken down by youtube due to a copyright issue with NBC… which must have been related to the section of video I used showing useless car parking and drivers as a background in parts, just to fill the visual space.

Related Options articles

• High-Yield ETFs’ Love-Hate Relationship (online.wsj.com)
• T. Boone Pickens Energy Fund announces exchange ratios (newswire.ca)