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These New Funds Could Mean Death to Index Options

By Jeff Clark
Tuesday, November 18, 2008

Leverage is alive and well.
 
Oh sure, we can't buy houses with no money down anymore. Brokerage firms can't trade with 30-to-1 leverage. And hedge funds are scrambling to raise cash in order to pay down debt.
 
But for the individual investor, the speculation punchbowl is still filled to the brim.
 
Two weeks ago, Direxion Funds, a leading provider of leveraged index funds, introduced eight new exchange traded funds (ETFs) offering 300% leverage. These funds provide three times the returns of the underlying indexes. For example, if the Russell 2000 rallies 10%, then TNA – Direxion's triple-leverage small-cap fund – will gain 30%. If the Russell 2000 index falls, then the decline in TNA will be three times as large.
 
Here are the 300% funds that Direxion offers so far...
 
Ticker
Index
BGU
Russell 1000
TNA
Russell 2000
ERX
Russell 1000 Energy
FAS
Russell 1000 Financial
 
 
BGZ
Inverse Russell 1000
TZA
Inverse Russell 2000
ERY
Inverse Russell 1000 Energy
FAZ
Inverse Russell 1000 Financial
 
Direxion has plans to introduce several more 300% funds on some of the more popular indexes, like the S&P 500 and the Nasdaq 100. And if this catches on, we can look forward to other firms coming to market with 400% and 500% leveraged funds.
 
The problem, of course, is that most investors will use the leverage the wrong way and end up doing more harm than good to their trading accounts. There is, however, a smart way to use these funds...
 
For the past several weeks, I've been telling S&A Short Report subscribers that the only way to trade this market is to look for intraday scalping opportunities. Take a position early in the day and be willing to trade out of it for a small profit. And don't hold any "scalp" position overnight.
 
The market has been volatile enough that scalping stock trades can be profitable. But option trading doesn't work. Option premiums are just too expensive. And stocks don't move enough intraday to generate profits on the options.
 
Now, however, with the triple-levered ETFs, investors can get option-like leverage and can capitalize on smaller moves in the underlying indexes. For example, during last Thursday's roller-coaster ride, when the market fell 4% on the opening and then rallied to close up almost 8% on the day, investors could have purchased BGU near $29 per share and then sold it at the end of the day for more than $42. That's a 45% gain in just a few hours.
 
Leveraged funds aren't for everyone. And scalp trading is only for the most aggressive traders. But if you have the discipline to keep your position size small, and you can keep an eye on the markets during the entire trading day, then these new 300% leverage funds can be a terrific tool during this tough market.
 
Best regards and good trading,
 
Jeff Clark




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New York commercial real estate giant SL Green hits seven-year low.
 
American icon Harley-Davidson hits 10-year low... down 62% this year.
 
Earnings today... Home Depot, Saks.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1224.71 +0.3% +11.4%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.19 -0.6% +7.2%
Euro 1.34 +1.4% -11.0%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%