How to Trade Leveraged ETF Options

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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 trade options on leveraged etfs, in which retail investors are getting exposure to financial instruments that they don't need-- trade options on leveraged etfs 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 trade options on leveraged etfs the instrument they claim trade options on leveraged etfs 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:. Take for example this trade in FAZ. Assume that you wanted to gain some short exposure in the financials.

Do note that this isn't a recommendation, although my subscribers are in something similar that expires this week. So if we want to get some short exposure to financials, we could look to Sell the January 19 puts -- let's look at 5 contracts: From this position we can see that our initial delta risk is -- so that means we are effectively long shares of FAZ, which means we are short about shares So we must assume that FAZ will track another trade options on leveraged etfs on a percentage basis.

As you can see, the FAZ put sale only requires about in margin initially-- although that will increase if the trade goes against you. The downsides, in my opinion, come down to the trader. On top of that, this trade makes the assumption that the implied volatility in the option is too high with respect on where we are headed in the near future. So if the financials catch a strong bid and the volatility picks up, this can be a losing situation. Given the current volatility environment, this trade has worked out quite well for the past 2 months, but it remains to be seen what January will bring.

My subscribers have something similar to this trade open in the model portfolio. I've put together an Iron Condor Trading Toolkit that gives you the case studies and training needed to be consistently profitable in the market. Trade options on leveraged etfs Here to Get the Toolkit.

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. They encourage poor risk management as there is an extreme exposure to the underlying instrument.

If the trader is not careful, more exposure can be gained than what is needed to generate a positive expectancy. The options are incredibly liquid. Daytraders and speculators provide a significant amount of volume throughout the trading day -- this is very nice to have when exiting out trade options on leveraged etfs a position, as liquidity is an essential part of risk management in trading options.

The options trade in penny increments under 3 and 5 cent increments over 3. The strikes on the options are also a dollar wide. This adds to the liquidity. Selling options provides a positive theta, which can actually take advantage of the mathematical issues that the etfs provide. So here are the advantages to this trade: Because of the liquidity, you can exit out quickly if you're wrong.

Selling options provides positive theta, so you don't have to be right in a big way, the name can stay at the same price and you'll still make money You gain a significant amount of exposure for less capital -- that can free up money for you to do other trades like hedging this position!

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