Discussion in 'Options' started by TraderSU, Apr 11, 2009.

  1. These are 3x leveraged ETFs and do have a significant time decay.

    If I want to bet on FIN going down and buy FAZ-call , I've two time-decay working against me? And if I buy FAS-put, the ETF decay will take some pain out of my option decay :D

    So buying FAS-put should be better than buying FAZ-call.

    Similarly if betting other direction, buying FAZ-put should be better than buying FAS-call.

    Am I missing something? PROs - please suggest.

  2. Answering my own question.

    FAZ-call has unlimited upside as underlying has unlimited upside. Buying call will allow us to capture the whole upside.

    FAS-put has limited upside as the underlying has limited downside - FAS can never fall below zero.

    It would not matter much if we were looking for only 10-20% move in underlying.

  3. MTE


    FAZ doesn't have unlimited upside as it moves inversely to the financials, which can't go below zero. I'm sure you'll find some limit to the upside of FAZ if you look into the prospectus.
  4. There is unlimited upside, since you are trading on percentage moves, not absolute. The thing is rebalanced daily. If financials went down in value 10%/day into perpetuity, FAZ would go up 30%/day into perpetuity.

    Unfortunate compounding based on these principals (up 10%, down 10%, repeat) can seem like a virtual time decay. But in a strict sense, it is not time decay - it is a function of adverse compounding.
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  5. MTE


    Theoretically, yes, but I suspect FAZ uses some structure to generate these 3x daily returns, which may have a cap eventually. I may be wrong though. I would suggest reading the prospectus before making any assumptions and/or trading it.
  6. The 'structure' they use is to re-balance the portfolio daily. That incurs lots of added expenses and eventually, this entity will spend itself into oblivion.

    These are for day traders and not for investors.

  7. In this choppy market if I make a directional play I prefer to buy a put when I anticipate a pullback. Hopefully the IV is relatively low with the underlying near the top of its upswing and I will gain some theta decay on my DOTM puts when IV increases as the underlying drops in price. So, yeah, I agree with buying puts is the better strategy.

    What benefit do you see in using the FAZ or FAS? It seems like the market would compensate for price erosion with lower IV with OTM puts. I'm not really sure how the market would handle price erosion with ITM puts but since the furthest month out, October, has pretty low volume I think it's largely an ignored strategy. But I don't know. Maybe you can make it work for you.