Mar 11, 2009

Using Decay in Leveraged ETF's to Make $$ All the time

FAS and FAZ are 3X leveraged Exchange traded funds that are meant to track the Russell financial index (RIFIN.X). Because they are rebalanced daily, Direxion recommends that they be used only as day trading vehicles. While I agree with this premise of Dixexion, it might be hard for all traders to employ a day trading strategy because of the $25000 requirement. Another common idea proposed is to short both FAS and FAZ and hold them short while gaining profits over time with the decay. But you need a large capital reserve for that in your account and it is highly risky and can cause margin calls. So what to do ?? Here I propose..

a slightly different strategy that takes into account the volatility in these ETF's and makes a you good bit of money, while at the same time limiting your downside risk, offering you additional leverage and a great boost in confidence when you look at your portfolio. However to know this strategy you would need to know some basic things about charting, technical trading and most importantly options, and have option trading capabilities in your brokerage account. However, you need only simple privileges like buying calls and puts and covered calls. Options do carry a lot of risks, but the risks are about as much as the risks in these leveraged monsters FAS and FAZ.

How is that possible? Thanks to the wonderful book on Options by Jeff Augen, a master in Options trading, I realized the power of options (sorry for sounding like an informercial). But at the same time I did not get carried away. I used a combination of covered calls, naked calls and naked put option strategies, and deployed them using momentum when the market was in my favor (selling covered calls) and as contratrian when the market was against me (buying calls when stock is falling; buying cheap puts when stock is rising).
I would like to thank my friend Nishant for advice on covered call strategies. If you are more interested in options trading you could also check out this book on trading at Opex.

So what is a learning trader to do.
1. Have patience
2. Have capital ready
3. Be quick to jump into a contrarian position once you feel that an ETF is oversold based on RSI on a 1-2 day chart interval, looking at 15 min interval points.
4. Be willing to take only small capital risks, but be willing to lose all the capital at opex. (isnt that the standard risk statement given with options anyway?)

So anyway what did I trade and how did I do?
I traded options on UYG (covered calls)
UYG basis 2.9, sold $3 calls twice, let it expire when UYG was down in the dumps.
Sold $3 call once in late March, covered when the volatiliy swung the option premium to 50% less.
Then sold again when it ran up and got divested of my UYG stock at Opex because it remained above 3 at opex.

After that I have mainly traded in FAZ calls. I made several small profits but I am getting my aZZ handed to me on my FAZ 12.5 May calls, losing almost 100% of the 250 dollars I placed into.
However I am recovering a bunch of that loss already through FAZ June $4 puts and plan to add more of $3 and $2 puts for June and July, which should put me in good positive.

FAS calls, I missed getting into $11 May calls when the ETF was at 8.40, biggest regret yet!!

Anyways Overall I have made over 65% net on my capital in ETF options. I have had losses without which I would be up even more, but then losses are part of trading, and I regret not getting out sooner from those FAYEV calls.
I am way cautious now, and almost all into FAZ puts because I feel the decay will be strong on the FAZ side for sometime now.
ALSO THE KEY MESSAGE TO TAKE HOME IS THAT DO NOT BE TOO GREEDY and HOLD ON TO YOUR PROFITS TOO LONG. Play the Volatility to your advantage!!!
Equity Options
BMY calls. Made over 80% gains. Now sitting on June calls looking for some upside.

JAVA: Made some money on the stock, sold soon, but reinvested the profits in May $9 calls. Proved correct when Oracle made takeover bid. Promptly sold SUQEA calls for 0.30 cents (basis 0.12) to good coin.
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