The 3X funds from Direxion have grown to 22 in number. These 3X funds have been widely disparaged, because they have been used as longer-term holds by investors who did not realize that the funds are designed to depreciate (in proportion to the volatility of the price) a bit every night. The funds only have low depreciation when they do not change much in price. However, as a convenient hedge in a daytraded pairs play, they are perfect because they require relatively little capital to establish a position. This is how they were designed to be used. For instance, if during the morning opening, you think that Research in Motion (RIMM) will move up in price, you might buy some RIMM and some TYP, the Technology Bear, and hold both through the trading day. If technology shares sink, taking RIMM down with them, you would be hedged by owning TYP, which would rise. But if RIMM behaved as you suspected, and rose faster than technology in general, you could sell them both at the end of the day with a profit.
Because the funds reset and depreciate overnight, they are not a good choice for an overnight hold unless you feel that the potential for a large move, with the high leverage the 3x fund gives you, outweighs the cost. This can be partly offset by using short positions instead of long ones. For instance, in the previous example, instead of going long TYP the Technology Bear, you can go short TYH the Technology Bull. In doing so, the depreciation will tend to work to your advantage for the overnight position. Shortable shares for these funds are sometimes hard to find, or require a shorting fee from your broker. This tends to partly offset the potential gain of going short a bull and bear fund both and trying to design a pairs trade to profit from the depreciation. (a strategy which CAN pay off if you do your math - I may write an article on how to set this up later...)
But the ultimate example of unbridled, extreme, red hot firepower in trading these funds has to be playing them with options. Every one of the Direxion funds is optionable! Buying a deep-in-the-money call or put on one of the funds gives you a minimum of premium, a maximum of intrinsic value, and a leverage which is enormous. It is having a tiger by the tail. Give it a try, but be very, very cautious. -- by Skymist