Tuesday, January 20, 2009

A look at how well do options work on 3X leveraged ETFs

There are all kinds of leveraged 2X and 3X ETFs on the market these days, most of them with options.

Since a typical option on a regular stock leverages the investment by 100X, do the options on 2X or 3X ETFs represent leverage of 200X or 300X?

We look at the performance of some ETFs this week, particularly Monday January 12.

The following table shows the returns for:

XLF, SKF, UYG (2X financials)


IWM, TNA, TZA (3x small cap Russel 2000)

(please click on image to enlarge)

Some of the individual charts are shown below. The thicker the line, the higher the volume.

Clearly, the performance of the 2X and 3X ETFs is not 200 or 300X. An investor is better off using the 1X underlying, not only for the returns, but also for the much higher volume of traded options.