Friday, November 14, 2008

Prediction: Direxion Triple ETFs Will Revolutionize Day Trading

I promised myself that once the new Direxion 3x and -3x ETFs started trading at least a million shares a day that I would take them out for a test drive. Well, I didn’t have to wait very long. Launched just last week, two of the eight new ETFs hit the million share mark yesterday and a third missed only by a rounding error.

To recap for those who do not follow this space, Direxion is the first company to offer ETFs that have a targeted return which is leveraged to three times and minus three times that of the underlying indices. So far the biggest successes have been the large cap 3x bull (BGU) and large cap -3x bear (BGZ) ETFs, which are based on the Russell 1000 index. Also proving popular are the small cap 3x bull (TNA) and small cap -3x bear (TZA) ETFs, which follow the Russell 2000 index.

The sector ETFs are off to a slower start. These include the large cap 3x bull (FAS) and large cap -3x bear (FAZ) based on the Russell 1000 financial services index; and the large cap 3x bull (ERX) and large cap bear (ERY) based on the Russell 1000 energy index.

A look at the table below of yesterday’s results shows that these ETFs are like nuclear weapons when it comes to volatility. The average change in these eight ETFs yesterday was a 25% difference from the previous day’s close. ERY closed at 52.44 yesterday. Not only did it lose 28.48 points, but its intra-day range was 35.06 points. It is only a slight exaggeration to say that you can sneeze and miss your position losing ten points. Needless to say, these super-charged ETFs are not for everyone. If you like to go skydiving, keep a pet alligator in the bathtub, and dream of a winter king crab fishing in the Bering Strait, then you will be right at home with the Direxion ETFs.

As I traded these for the first time on yesterday, several interesting things happened. First, just entering a position was an adventure, almost like trying to jump in a Lamborghini while it sped by at 120 mph. I immediately went into position management mode, because the value of my ETF was changing so quickly that it required my full attention. Very quickly, I realized that one cannot trade these triple ETFs without finely honed trading rules and an iron will to act on them at all costs. In this world, there is no room for hoping. Any sort of “it will come back” thinking could quickly turn a 5% loss into a devastating 20% loss. Ironically, the high volatility of these ETFs forces the trader to rely on (or learn) tight trading discipline.

Retail investors might want to take these ETFs out for a test drive too, but be forewarned that there is a disaster scenario looming around every corner. For these very same reasons, I anticipate that hedge funds currently day trading options will find these ETFs to their liking, particularly as volume and liquidity improve. In a deleveraging world, this is one way to stock up on “off balance sheet leverage” and get the extra juice without having to commit to the extra margin.

Not that extra leverage is usually a good thing…

[source: Yahoo]


Anonymous said...

Looks like there are options on them as well (yay!): though I'm not noting any open interest so far, and the bid/ask spreads are all larger than the options' premia, so I think I'll wait a year myself....!

bzbtrader said...

You need to look at some pictures of snakes and calm down a bit or you're going to stroke out chasing the BGU/BGZ. First of all the spread on this pair is running .06 -.15 depending on momentum. IMHO, if you really want to stick your hand in the fire, BGU is the way to go, either long or short. It's got half the price, double the volume and better spreads then the BGZ. Probably best traded with with an algorithmic auto trade system to control risk, although the whipsaws can be VERY costly, so have a lot of risk capital handy. Also, in terms of % change elative to the IWM, BGU/BGZ trade more like doubles than triples.

Anonymous said...

I don't understand the need for these double and triple ETFs. Commissions are low enough these days that reduced commissions cannot be the driving force behind these vehicles.

All these products do is make it easier to use the stock market for gambling, rather than investing. I do recognize that the market itself has been a casino in recent times, but that's no reason to entice the public into gambling.

IMHO these should never have been allowed and should be forced off the market. Yes, I know - that will never happen.

Why do you want to trade them?

Anonymous said...

looks like in a few weeks some of these ETFs will go to zero.


heywally said...

Assuming you're willing to take a minimum approx $40,000 (S&P index equivalent) position (with 1 contract), why not just trade the ES futures which are totally liquid, have great spreads around the clock, and allow you to respond to overseas markets activity either in the evening or pre-market?

Anonymous said...

hey mark

you hit the nail on the head

"to entice the public into gambling"

and that is exactly what this market is turning into

lots of ridiculous individuals have decided to trade for a living recently after watching fast money on CNBC and want to trade their $10,000 account into millions within couple years.

Not to mention tons of college kids with less than $5,000.

I mean their account don't even allow day trading and yet here they are trying to get as much leverage as possible to make some money.

What's even more ridiculous is that since their non margin account dont allow pattern day trades, they are even jumping in to the emini futures.

CNBC really changed the markets.

It's a joke more than serious investing.

I mean I am a full time technical analyst but it's funny to see all these people laying out fibonacci levels and drawing trend lines left and right and calling for a market crash so they can make couple hundred bucks in their 10K account.

They should blow up their accounts and that willl teach them a lesson.

Anonymous said...

These vehicles are similar to no limit holdem games that play quite deep but will often have very low minimum buyins. A $100 minimum buy-in table where the typical open raise is $20 for example.
This type of structure gives a small-stakes player a round or two to try to pick up some cards and a giant rush when they eventually push all-in with whatever mediocre hand they ultimately choose to get behind--but it rarely ends well.

Anonymous said...

Levered ETFs and short ETFs seem like the biggest scam ever to me.

The groups that manage these funds that manage these take a huge percentage (95 basis points for Direxion funds, I think) and there is also no guarantee that the ETF approaches the targeted leverage ratio.

Read more about why I think the Triple ETFs aren't a very good strategy at my blog, FattyFatFat.

Celal Birader said...

I don't know about the 3x variety; but, i have successfully used the 2x sectoral ultra shorts as a hedging tool against long positions held in the relevent sector.

As a result, i've been able to come back from a number of positions which have gone underwater since i had bought them in October.

Bill Luby said...

Two weeks later, it looks like my prediction has already come true. Bespoke has the details in 3x ETFs on Fire

Anonymous said...

love your blog good stuff

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2023 Bill Luby. All rights reserved.
Web Analytics