3x ETF's Long Timeframe Safe From Drift?

[Country Roads]

Trying to better understand options on 3x leveraged etf's; how many months out would you feel comfortable buying an option on a 3x etf? Concerned about losses from drift piling up.

Perhaps someone can also help me understand choosing strike dates & prices;

Is it okay to buy options with no open interest or volume? Will market maker ALWAYS buy option back from you no matter what?

Or is open interest at least "one" of your factors when picking a strike date/price?

 

[xandman]

There's going to be compounding costs going against you. Much worse going long term.

Now if your thinking that you can sell calls on the SPY 3X ETF VS 3X calls on the SPY as an arbitrage, there maybe a study showing that the cost drag is already priced into SPY 3X ETF calls.

My question is do you get a credit for the management fee in an inverse ETF?

 

[Country Roads]

There's going to be compounding costs going against you. Much worse going long term.

Now if your thinking that you can sell calls on the SPY 3X ETF VS 3X calls on the SPY as an arbitrage, there maybe a study showing that the cost drag is already priced into SPY 3X ETF calls.

My question is do you get a credit for the management fee in an inverse ETF?

Xandman, believe management fees are about 1% give/take on these - but one random drift chart for 3x etfs I ran into appeared to show perhaps 20% a year loss to drift, if that sounds normal?

Trying to learn options, so main interest is to buy a call/put in one direction and keep it simple. The 3x leveraged etf's "appear" to be safest as you can risk 3x less money on the option itself - so much better protected in the event of total option loss.

Thinking perhaps buying a 3x leveraged call 4-5 months out, but I just have no idea if its normal to do that with 3x options, or does that sound like a bad idea to go out that far on a leveraged etf?

 

[xandman]

I've never calculated drift myself. I am just thinking abstractly. At best, 20% seems an overwhelming disadvantage to using the 3X ETF. Why would you go long on a 3X?

Your trade is perfectly "normal" given a bullish outlook. Same concerns as any option trade: liquidity, sizing, price(IV), getting the direction right.

I hope you are just leveraging up for more capital and not trying to go all-in. But, that's your prerogative.

 

[murray t turtle]

Concerned about losses from drift piling up.
Is it okay to buy options with no open interest or volume? Will market maker ALWAYS buy option back from you no matter what?

%%
SURE it's OK\ but lower the volume generally the WORSE the slippage. So strike one/
strike 2 + 3= too much leverage, unless its 1987 in about half hour.
NOT a prediction but if its not 1987 move by 1:00 CST, i would refigure it by close today.
SDS or QLD/SSO can move better than 3 X/depending...... NO bid price = no go/ unless a monster move , which seldom happens

 

[Country Roads]

I've never calculated drift myself. I am just thinking abstractly. At best, 20% seems an overwhelming disadvantage to using the 3X ETF. Why would you go long on a 3X?

Your trade is perfectly "normal" given a bullish outlook. Same concerns as any option trade: liquidity, sizing, price(IV), getting the direction right.

I hope you are just leveraging up for more capital and not trying to go all-in. But, that's your prerogative.

The leveraged etf's cost significantly less, like 1/6 the price of a non-leveraged option contract - so my thought was that I am controlling risk, or can think of the leveraged contract as an acceptable loss.

Of course the odds of a non-leveraged say PUT contract becoming worthless appear to be much lower, seems like a non-leveraged PUT that falls out of the money will always be worth something right? So perhaps I'd be safer just staying non-leveraged at my skill level here.

 

[Country Roads]

%%
SURE it's OK\ but lower the volume generally the WORSE the slippage. So strike one/
strike 2 + 3= too much leverage, unless its 1987 in about half hour.
NOT a prediction but if its not 1987 move by 1:00 CST, i would refigure it by close today.
SDS or QLD/SSO can move better than 3 X/depending...... NO bid price = no go/ unless a monster move , which seldom happens

Murray, yes hadn't thought about volume actually causing the slippage, but that makes sense. What do you mean "NO bid price = no go/ unless a monster move" ?

 

[xandman]

The leveraged etf's cost significantly less, like 1/6 the price of a non-leveraged option contract - so my thought was that I am controlling risk, or can think of the leveraged contract as an acceptable loss. Of course the odds of a non-leveraged say PUT contract becoming worthless appear to be much lower, seems like a non-leveraged PUT that falls out of the money will always be worth something right?

Your capital outlay to take a position in an ETF or option the transformation of a cash exposure into another asset exposure. It is an investment by definition.

You control risk by controlling your exposure to an adverse move in the underlying asset. With that, I acknowledge that a long call will provide more protection to the downside.

Effectively same odds(probability) on puts assuming the same strike Delta. Leverage is just a profit multiplier.

 

[murray t turtle]

Murray, yes hadn't thought about volume actually causing the slippage, but that makes sense. What do you mean "NO bid price = no go/ unless a monster move" ?

%%
WELL since like a monster move 1987 did not happen by 1:00 today,I stayed away from 3X ETFs, then.
So it was no go for me. I dont regret getting out of[3x] UPRO or into SH, again today /but it has little or none leverage; market maker$ always buy those back.
Many of those 3x ETFs are what Molly of NPR called ''crazy market'' I was hoping to buy TQQQ or FNGU [3x]today but NOT much of a bid price except too near to close price for me. Good question

 

[Country Roads]

Your capital outlay to take a position in an ETF or option the transformation of a cash exposure into another asset exposure. It is an investment by definition.

You control risk by controlling your exposure to an adverse move in the underlying asset. With that, I acknowledge that a long call will provide more protection to the downside.

Effectively same odds(probability) on puts assuming the same strike Delta. Leverage is just a profit multiplier.

Thanks Xandman, that makes sense. Do most traders run a stop of some sort with long calls/puts while swing or position trading? I took a position with a strike many months out based on a pretty strong view, so its really hard to consider any kind of tight stop, but perhaps 25% loss I could call it? Something like that, just not sure how you manage risk when position trading options in a volatile market.