Leveraged ETFs Giving Big Premiums for Short Trades

|
 |  Includes: DDM, DIA, DIG, DPK, DUG, DXD, DZK, ERX, ERY, FAS, FAZ, GLD, GLL, IWM, IWN, IYE, IYR, QID, QLD, QQQ, REW, ROM, SCO, SDS, SIJ, SKF, SMN, SPXL, SPXS, SPY, SRS, SSG, SSO, TECL, TECS, TLT, TMF, TMV, TNA, TWM, TYD, TYO, TZA, UCO, UGL, UNG, URE, USD, USO, UWM, UXI, UYG, UYM, XLB, XLE, XLF, XLI, XLK, XLP, XLV, XLY, XME, XRT
by: Option Maestro

With just 10 days left until the option expiration, I have crunched the numbers on some of the most popular leveraged ETFs and it looks as if they're getting some summer heat. I am the first to admit that I think these ETFs are only for traders (and are an investor's nightmare), but they are so volatile, and bring such great premiums, it is hard for a trader of options like me to resist. A very short hold of 10 days could yield you a nice return considering it is only for ten days (crunch the numbers on an annual basis).

I have developed several strategies with these leveraged ETFs which seem to return steady profits month after month, and I usually wait to implement them within the two week expiration period.

This analysis requires the knowledge of options. These would be returns based on the buy/write option strategy (as of market close Monday July 6, 2009). To gain a better understanding of the buy/write option strategy and options in general click here or check out my blog.

For this analysis I used a rather bullish approach on both the bear and the bull ETFs to gain a higher return (assuming the ETF expires above the indicated strike which is unlikely but very possible) and a lower downside protection. If using any of these ideas, you will most likely have to adjust strike price and expiration according to your opinion.

Understanding the Tables:

Strike Price: The price I chose for the ETF to close at or above at expiration in order to sell the stock (stock sold at strike price).

% Return: This is how much the position would return (less commissions) if the stock were purchased at beginning of trade and the indicated option immedietly sold, and the stock closed at or above the indicated strike price as of July 18, 2009 (option expiration).

% Protection: This is how much the stock could go down before you start losing money on the position.

From the list above I am most interested in: (NYSEARCA:UCO), (NYSEARCA:SCO), (NYSEARCA:SRS), (NYSEARCA:SMN), (NYSEARCA:ERX), (NYSEARCA:TNA), and (NYSEARCA:TZA). These leveraged ETFs are among some of the highest return % if called out and offer good downside protection. Many of these are the bears which is another reason I am interested in using them as my portfolio is about 80% long positions, and this will help reduce my risk.

There are many more covered call ETF strategies to profit from. If you're more conservative and want to take on less risk check out the ETFs listed below. However these all receive much lower premiums than the leveraged ETFs. Compare the leveraged ETF option premiums to the option premiums on the most popular ETFs (no leverage tracks basket 1X) such as those in the table below:

Consumer Discret Select Sector SPDR (NYSEARCA:XLY)
Consumer Staples Select Sector SPDR (NYSEARCA:XLP)
DIAMONDS Trust Series 1 (NYSEARCA:DIA)
Energy Select Sector SPDR (NYSEARCA:XLE)
Financial Select Sector SPDR (NYSEARCA:XLF)
Industrial Select Sector SPDR (NYSEARCA:XLI)
iShares Dow Jones US Energy (NYSEARCA:IYE)
iShares Dow Jones US Real Estate (NYSEARCA:IYR)
Materials Select Sector SPDR (NYSEARCA:XLB)
PowerShares QQQ (QQQQ)
SPDR Gold Shares (NYSEARCA:GLD)
SPDR S&P 500 (NYSEARCA:SPY)
SPDR S&P Metals & Mining(NYSEARCA:XME)
SPDR S&P Retail (NYSEARCA:XRT)
Technology Select Sector SPDR (NYSEARCA:XLK)
United States Natural Gas (NYSEARCA:UNG)
United States Oil (NYSEARCA:USO)
Utilities Select Sector SPDR (NYSEARCA:XLV)
Click to enlarge

Any of the ETFs listed in the above table are much more safe and investor friendly, however if you are a trader and seeking premium it would be in your best interest to keep an eye on some of the leveraged ETFs mentioned in this article.

To get more information about trading options click here.

For your convenience I have put together printable spreadsheets of both the 2X and 3X leveraged ETFs ranked from least to greatest % Return and % Downside on my blog here.

Disclosure: No Positions