Tuesday, May 26, 2009

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.


GS751 said...

Ok I just had a ?. I've read your blog for over a year now I rarely ever comment but your blog is one of the best. the ? I have is what actual options are used to price the VIX. Options on the /ES futures? Options on the SPY ETF? I am familiar with the calculations but what options are they using when they quote the VIX?


Bill Luby said...

Hi George,

Thanks for the kind words. I appreciate it.

The actual options are options on the S&P 500 index or SPX. Of course this is very similar, but not identical to SPY and has a lot in common with the front month /ES futures.

If you are so inclined, you can find out more about SPX options from the CBOE: SPX optionsCheers,


P.S. I like the work you do at Volatility Soma

P.P.S. I have a boatload of emails and some comments to get caught up on and I am going to start from the present and work back as far as I can

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