Monday, December 8, 2008

The Direxion Triple ETF Revolution Has Arrived!

Three weeks ago last Friday I thought I may be sticking my head out a little too far in Prediction: Direxion Triple ETFs Will Revolutionize Day Trading. Well, here we are barely three weeks later and these triple ETFs are racking up more volume in the first half hour of today’s session than they did in an entire trading day when I made my original prediction. (see graphic below)

In short, the revolution has already arrived.

Sure, there have been some issues with tracking error as Adam at Daily Options pointed out in Triple the Fun. On an intra-day basis, however, these ETFs seem to track and trend relatively accurately. And if you get the direction right, are you really going to be upset that you were right a factor of say only 2.7 times the underlying instead of an advertised multiplier of 3.0? Either way, it was still probably a wise allocation of capital.

The next frontier may turn out to be options strategies associated with these 3x and -3x ETFs. All eight of these ETFs are optionable and options activity seems to be picking up rapidly, particularly in BGU, the large cap 3x bull ETF, which currently sports an implied volatility of about 150 and a historical volatility in excess of 200.

[source: Yahoo]

9 comments:

David Neubert said...

There are still credit risks of the banks that give the ETF its swap line isn't there?

Bill Luby said...

A good question, David.

I would definitely think that counterparty risks associated with swap agreements would be at the top of the current list of risk factors. That being said, for those who choose the day trading route, this risk factor probably approaches zero on an intra-day basis.

Cheers,

-Bill

Eric said...

I bought FAS at 13.79, and it feels really good. Trying to figure out if I should add here. I was really hoping for another test of the bottom so I could pick up more of this.

What are your thoughts on Treasuries since the spike on Friday?
I bought TBT (43.25), PST (56.21), and some Puts on TLT (Jan 111 Put).

Other than the Puts, these should give a nice return on any measurable rally.

Bill Luby said...

Eric,

I like your TBT play -- I just wonder if it's a little early. I have the same idea, but I'm holding off for now.

Cheers,

-Bill

Eric said...

Bill,
Are you concerned about Gov't propping up the T-Bill market? Is there a scenario that you foresee where the market may increase without the T-Bill market decreasing?

I really only want to be in this position 30-60 days max though. I see that the overall trend since May 2004 in TLT is up.

Regards,
Eric

Bill Luby said...

Eric,

My issue with TBT more technical than fundamental. I think that recent 14 day moon shot is now reversing...and I just went long TBT.

Sure stocks and bonds can be positively correlated for awhile and sure the govt. can influences prices in the ST, but I think the odds are favorable for a 5-20 day swing trade.

Mark Wolfinger said...

"are you really going to be upset that you were right a factor of say only 2.7 times the underlying instead of an advertised multiplier of 3.0?"

Yes. Very upset.

Why trade these triples when I can simply trade 3x as many shares of 'regular' ETFs? Commissions are so cheap that I don't understand why anyone would bother to introduce, or trade, these vehicles.

Bill Luby said...

I hear you Mark and you make some valid points.

My thinking was more along the lines of capital requirements than tracking error. It is interesting -- and appealing to many -- to think about being 100% long (short), not using margin, and still having 2/3 of one's capital in reserve...without having to go the options route.

Also, sometimes that tracking error can work in your favor.

The bottom line is that these trades will only appeal to a small group of traders. So far I have found them to fit nicely with some of my approaches.

Cheers,

-Bill

Nick H said...

How about just trading e-mini futures? A very liquid market and your trades are backed by a legitimate clearinghouse. Not to mention more leverage than you could ever need.

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