Monday, March 16, 2009

More on the performance of leveraged ETF options

We discussed the options on leveraged ETFs in an earlier post. Here is another study.

We looked at XLF versus SKF for the period March 3 to March 25. During this period, SKF dropped from around $260 to $90, while XLF went up approximately from $6 to $9.20.


Move Percentages:

Picking a price in the middle of the range, SKF 150 puts went up 350%, while XLF 8 calls moved up 800%. The others are similar.


Now, if we look at the volumes, it is clear that XLF has signifcantly higher liquidity. This makes it much easier to buy and sell the options, and also reduces the spreads between bid and ask prices.

Once again, based on this study, it is much preferable to use options on the underlying stock, and not on the leveraged ETF. There is no corresponding leverage on the leveraged options. This, in addition to the immense risks of holding a leveraged ETF which have been discussed here so many times.

Monday, March 2, 2009

Oil and gasoline ETFs: USL, USO, or UGA?

U.S. unleaded gasoline prices has usually seasonal strength from January to the end of April. During this time refiners tend to convert from heating oil used in winter to gasoline used during the summer. Refiners also use this period to perform annual maintenance programs. Gasoline consumption goes up while inventories usually go down. This is why gasoline prices rise during this period, typically this trend lasts until May for retail prices.

In the USA, demand for gasoline is still higher in spite of the recession in the economy. A good chunk of U.S. refineries is old and need to undergo significant maintenance and repairs. If you remember, the hurricane season last year also was quite violent with many hurricanes entering the Gulf of Mexico and causing significant damage to oil and gas installations. Remember Fay, Gustav, Hanna, Ike,, Josephine, Kyle?

In addition, the spread between crude oil and refined product prices ("crack spreads") were below average late in 2008 and have not recovered much in 2009.

If you agree that gasoline prices will outperform oil, then UGA is a better investment vehicle. UGA invests in future gasoline contracts:

"United States Gasoline Fund is an exchange traded security that is designed
to track in percentage terms the movements of gasoline prices. UGA issues units
that may be purchased and sold on the New York Stock Exchange (NYSE) Arca. The
Fund is managed and controlled by its general partner, United States Commodity
Funds LLC. USG pays the General Partner a management fee of 0.60% of net asset
value (NAV) on its average net assets. USG invests in a mixture of listed
gasoline futures contracts, other non-listed gasoline related investments,
Treasuries, cash and cash equivalents. "

Below is a chart comparing USO, USL, and UGA for the last 3 months. Clearly, UGA is the top performer of the three.

(please click to enlarge)

Keep in mind that UGA is a cousin of USO/USL and may suffer from same rollover issues, but at least it offers better odds for someone who wishes to invest in this area.