Triple ETF Options Landscape One Month After New Margin Rules

On December 1^st, the Financial Industry Regulatory Authority (FINRA) implemented more stringent margin requirements for leveraged ETFs in Increased Margin Requirements for Leveraged Exchange-Traded Funds and Associated Uncovered Options.

On that day, I updated my table of all the optionable triple ETFs and now that one month has passed, I thought it might be interesting to see how the activity in these ETFs and their options may have been affected by the new margin requirements.

Using data from iVolatility.com, I have captured the highlights below. While not shown here, I should note that in the almost three months from my previous update on September 9^th to December 1^st, four different triple ETF pairs (UPRO/SPXU, TNA/TZA, DRN/DRV and EDC/EDZ) showed substantial growth in volumes and every single pair showed some signs of increased interest -- so triple ETFs had significant momentum when the new margin rules were implemented. This time around, however, the only notable growth has been in the long bond pair, TMF and TMV, which admittedly comes off of a very small base. Also, there are signs that the large cap pair (BGU/BGZ) and the developed markets pair (DZK/DPK), are starting to lose traction.

Of course, we will never know whether interest in triple ETFs might have plateaued without the FINRA rules, but it is fair to say that FINRA has now stopped the growth momentum of triple ETFs in their tracks.

I will leave it for readers to pick through the data for some other interesting observations, but I would be remiss in not noting that the bear ETF implied volatility has dropped much faster that the bull ETF implied volatility almost across the board.

For the two previous posts in this series, readers are encouraged to check out:

• Updating the Triple ETF Options Landscape
• Triple ETF Options Landscape

[source: iVolatility.com]

Disclosure: none

Options on the Direxion Leveraged ETFs

The last time I checked in with the Direxion triple ETFs was in early February, when I asked Why Is There So Little Volume in the Most Recent Direxion ETFs? While that question did not receive a direct answer, I noted that in subsequent weeks, volume picked up dramatically in the two most volatile new pairs, the emerging markets (EDC and EDZ) and technology (TYH and TYP) ETFs.

Toward the end of February, Direxion launched another triple ETF pair, the mid cap bull (MWJ) and mid cap bear (MWN) ETFs. In mid-April, Direxion added some triple ETF bonds to the mix, with a 30-Year U.S. Treasury bull (TMF) and bear (TMV) pair, as well as a 10-Year U.S. Treasury bull (TYD) and bear (TYO) pair.

For more details on the current Direxion triple ETF lineup, check out the graphic below or visit the Direxion Shares ETF web site.

In addition to expanding the universe of available triple ETFs, Direxion has sought to address criticism of the tracking error in these ETFs by adding a “Daily” prefix to each ETF name, in order to emphasize that these ETFs are rebalanced on a daily basis and only attempt to match daily moves, not track the target indices over an extended period of time. Interestingly, anyone who visits the Direxion Shares home page is met first with, “Direxion Shares are not for everyone. Are they for you?” and a link that attempts to dissuade what they describe as the conservative investor.

One of the aspects of triple ETFs that I find has some interesting strategic implications is the availability of options. As of this week, there are now options available on all of the Direxion triple ETFs with the exception of the ones based on the EAFE index, DZK and DPK.

Needless to say, there are very few trading vehicles out there with the potential to move as rapidly as options on triple ETFs, but for experienced options traders, these options offer a great deal of potential reward, paired with commensurate risk, of course.

[graphic: Direxion Shares]

Disclosure: Long TYP at time of writing.

Why Is There So Little Volume in the Most Recent Direxion ETFs?

It seems as if every day trader I know has fallen under the spell of the leveraged firepower of the Direxion triple ETFs. Oddly, only the first batch of ETFs that were rolled out in November have caught fire. These include the familiar tickers like FAS, FAZ, TNA, TZA, BGU, BGZ, ERX and ERY.

The most recent group of ETFs, which I discussed in Direxion Triple ETFs Add New Horses to Stable, has attracted considerably less interest. Even though they were launched at the end of December, only two of the six ETFs, EDC and TYH, have surpassed the 100,000 single day volume mark and TYH just grazed that bar, with a high volume mark of 101,900. In the chart below, a snapshot taken just past the halfway point of today’s session, the six new ETFs can be seen floundering at the bottom.

Juice is not the problem, as emerging markets (EDC and EDZ) and technology (TYH and TYP) are consistently among the most volatile corners of the market.

The comments on yesterday’s semi-rhetorical question we excellent. Let’s see what sort of explanation the collective wisdom can come up with today.

[source: Yahoo]

Direxion Triple ETFs Add New Horses to Stable

While skeptics abound about the usefulness of triple ETFs for the long-term investor, I have been saying since early on that the Direxion triple ETFs would revolutionize day trading.

Now that their novelty has worn thin and traders have had an opportunity to experiment with various approaches to trading triple ETFs, these vehicles have become an integral part of the day trading scene, particularly on trend days.

Looking to capitalize on the appeal of these nuclear-tipped trading weapons, Direxion added six new triple ETFs last month. While interest in the new round of ETFs has so far been limited, I predict at least one of the triple ETF pairs has a bright future. My candidates for stardom are the pair of emerging markets ETFs: the 3x bull (EDC) and the -3x bear (EDZ). The reason is simply a lack of competition. At the moment, competition comes in the form of EEV the -2x UltraShort MSCI Emerging Markets ETF from ProShares. While EEV is a popular double inverse ETF, it lacks a companion +2x version for those who want a leveraged bullish play on emerging markets without having to short EEV.

It is harder to see the other new ETF pairs attracting the same attention that the emerging markets are likely to receive. Technology is a favorite investment theme and a source of considerable volatility, but the current ROM (2x) and REW (-2x) have always been second tier ETFs in terms of popularity, lagging well behind QLD and QID, the popular NASDAQ-100 ETFs. The new Direxion entries, TYH (3x) and TYP (-3x) clearly have their work cut out for them.

Last but not least are a pair of ETFs based on the MSCI EAFE index of developed markets and the popular EFA ETF that tracks this index of European, Australasian and Far East companies. The 3x bull (DZK) and the -3x bear (DPK) have a lot of appeal to me as a means by which to speculate or hedge in non-U.S. companies, but whether these funds will receive the same kind of attention as EFA remains to be seen.

For the record, Direxion has outlined their intention to expand the stable of triple ETFs to 32 in their current prospectus. The ETFs currently in the pipeline have a strong international (China, India, Latin America, BRIC) and sector (clean energy, real estate, homebuilders) flavor. The graphic below shows the triple ETFs currently available, with the recent additions circled in red.

These ETFs are not for the faint of heart and anyone who considers trading these might want to read my initial post on the subject to get a sense of some of the risks involved.

[source: Direxion]