Sell FAS, Buy XLF Calls

| About: Financial Select (XLF)

Investors who want to make a leveraged bet on a rally in banking stocks are often drawn towards the Direxion Daily Financial Bull 3x Shares (FAS). However, over time, this ETF does not track banking stocks very well. Evidence for FAS's long-term flaws can be seen when comparing it to the Financial Select Sector SPDR Fund (XLF).

In the time that both funds have been trading, XLF is up 11.28% while FAS is down 74.41%. For a detailed explanation of why this has happened click here.


A good alternative to buying FAS is to buy deep in the money call options on XLF. Buying call options on XLF gives investors leverage to the XLF directly. This strategy can be used by both short-term traders and long-term investors because of the strong liquidity of XLF options. The liquidity of XLF options can be seen by looking at open interest of both short-term and long-term contracts.

April 2012 Open Interest

Strike/ Open Interest

13: 1,724

14: 19,139

15: 168,242

16: 233,035

January 2013 Open Interest

Strike/Open Interest

13: 23,882

14: 96,185

15: 72,348

16: 77,395


Investors looking to make a leveraged bullish bet on banking stocks should buy XLF calls instead of FAS.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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