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ReaganD (31.14)

Buying Puts on Both 3x Bull and Bear ETFs

Recs

6

January 16, 2009 – Comments (13) | RELATED TICKERS: FAZ , TNA , SPXS

See my last post for an explanation of why both bull and bear ETFs trend down over time. 

I plan to play this using (slightly out-of-the-money?) puts on a 3x bull ETF and the corresponding 3x bear ETF.

The options are pretty liquid but they are pretty expensive because the underlying indexes are volatile.

Interestingly, people don't appear to be using my strategy.  Calls and puts on the 3x ETFs have approximately the same implied volatility.

I haven't pulled the trigger yet because I can't decide which strike prices the options should have.  I will buy the options that have the longest (July 09) timeframe.

Let me know what you think of this idea.

13 Comments – Post Your Own

#1) On January 16, 2009 at 2:05 PM, goldminingXpert (29.64) wrote:

The premiums are too high--the option writers know about this game.

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#2) On January 16, 2009 at 2:10 PM, anchak (99.85) wrote:

I agree with GMX.....the only way you can benefit from this strategy is if you had a medium volatility premium on a LEAP type play - then you can use this dual-hedge strategy profitably.

Otherwise you can get killed due to the expiration choice....

the FAZ/FAS dual put would have worked great on Nov 21st but then VIX was close to 90.....today at 50 VIX you are still paying almost similar Implied volatility.

All the best! 

 

 

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#3) On January 16, 2009 at 2:15 PM, Imperial1964 (97.87) wrote:

I like your thinking, but I agree with gmX.  It would pay off if we have a big unexpected market move, but otherwise the time decay is going to eat you up.

The market is already expected to be volatile and that is priced in.

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#4) On January 16, 2009 at 3:13 PM, ReaganD (31.14) wrote:

yeah i agree.  the premiums are high.  i feel like people aren't following this strategy though because calls and puts have similar implied volatility. 

i appreciate your input.  i feel like i'm better off following citron than doing this, haha

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#5) On January 19, 2009 at 4:24 PM, EverydayInvestor (< 20) wrote:

The correct way to do it is to short sell both ETFs, that way you don't pay a premium. Take a look at this chart of FAZ and FAS:

http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=1&chdet=1232400178993&chddm=19159&cmpto=NYSE:FAZ&cmptzos=-18000&q=NYSE:FAS&ntsp=0

I'm thinking of actually doing this--you need to keep a lot of money in cash to avoid margin calls, but this is essentially a way of betting on volatility, because the more volatility, the worse the pair will perform.

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#6) On January 19, 2009 at 11:11 PM, goldminingXpert (29.64) wrote:

Are there shares available anywhere Everyday? I haven't found any.

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#7) On January 20, 2009 at 9:25 AM, EverydayInvestor (< 20) wrote:

I got millions of shares of MWN/MWJ, TNA/TZA, and BGU/BGZ at Interactive Brokers. The one problem with this is that if volatility decreases substantially you will face losses. I'm still gonna try it with a little cash, though.

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#8) On January 20, 2009 at 9:37 AM, goldminingXpert (29.64) wrote:

interesting, I may join you on this trade.

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#9) On January 21, 2009 at 3:34 PM, ReaganD (31.14) wrote:

workin on getting an IB account.  i'm gonna short both bears and bulls.  that was my original idea, but I didn't think it was possible to get shares

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#10) On January 22, 2009 at 3:51 PM, EverydayInvestor (< 20) wrote:

point moot for me now ... none of the 3x levered ETFs are shortable at my broker (IB) anymore.

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#11) On January 26, 2009 at 5:24 PM, ReaganD (31.14) wrote:

IB's site says they have more than 10 million shares of tna/tza available to short.  thats weird

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#12) On January 28, 2009 at 3:18 PM, EverydayInvestor (< 20) wrote:

Reagan - yes, they are available again. They were not for a couple days.

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#13) On April 21, 2010 at 1:56 PM, MattP33 (< 20) wrote:

Very interesting information and discussion here. I have to admit that I always follow your website because it is full of various information about everything. But I have to admit that I have not known anything about the bull and bear ETFs. Well, I will definitely try to find more information about this subject. So thanks a lot one more time for the interesting post and keep up publishing these great posts in the future.
Regards, Matt Patton from dell inspiron 1200 battery website

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