Hello everyone, I apologize for the late post this week. I was traveling this weekend and am just getting a chance to look at the markets. Seems like all is well, at least on the surface? We’ll have to see what comes of this tariff mess and the consistently increasing geo-political problems to grasp any real sense of how things are. For perspective, I heard it said this way recently, “Investing today is similar to explaining cryptocurrency to your grandma.” I think that sums it up nicely.
That said, I’m reminded tonight of Jesus calling Peter to step out of the boat and walk to him on the water. Initially, Peter was focused on Jesus and completely safe. It wasn’t until he became fearful and started focusing on the environment around him that things changed, fast. I believe tonight, it’s a simple reminder to stay focused on both the things in life that really matter and the plans we have in place. Let Jesus take care of everything else.
With that, I wanted to write a post tonight about SOXL – the 3X leveraged Semiconductor ETF. This ETF is just built different, at least for now. So, if you’ll stay with me for a few minutes I’ll share some important features of this ETF.
Before I do, you may want to have a look at a new spreadsheet I built for Iron Condor traders. I called it the Signature Series – Iron Condor Spreadsheet because it’s simple, flexible, and above all, useful. You name it, if it’s needed to successfully trade the iron condor strategy, it’s probably built in. Thank you for having a look and feel free to reach out if needed.
Post Agenda
SOXL – The 3X Leveraged Semiconductor ETF Overview
So, to discuss SOXL – the 3X leveraged Semiconductor ETF, I think a basic overview is important. To begin, here is the Direxion Daily Semiconductor Bull and Bear 3X Shares website with all the pertinent data. I’ll leave the truly technical stuff to them.
SOXL as the name of the fund would imply tracks the semiconductor market. A semiconductor is, as Google puts it, “the fundamental building blocks to most electronics”. It’s a relatively easy to understand technology but without it apparently the modern world would look quite different. In other words, it’s important. At least in today’s world.
As such, SOXL offers traders or investors the opportunity to take advantage of this technology in a single package. Rather than invest with Nvidia or Broadcom, or really any other major technology company directly. SOXL bundles them all up and pours on some gasoline! Hence the leverage.
In one, relatively low priced ETF, we have the opportunity at exposure to some of the best companies in the world. Making SOXL an incredible mix of liquidity, weekly expirations, extreme volatility, and above average premiums. They’re just simply isn’t another product currently available that I believe matches this ETF.
How is SOXL Different?
Well, I suppose that’s really up for debate but the one true difference maker, as I see it, is liquidity. I’m just in awe of the liquidity I find up and down the options chain with SOXL. That said, it would be important to maintain a watchful eye on the liquidity levels. Should the bid/ask spread widen, even slightly, or if volume wanes, it may be time to hit the exit.
In any case, liquidity is just one difference I see. The heightened volatility here also means there will always be premium available, even way out of the money. Essentially unheard of on an asset that is currently trading for under $20 per share. To add perspective, premium ATM is even larger than TLT, which is currently 4 times higher in share price.
To put it simply, SOXL differentiates itself from other funds in a plethora of ways options traders would appreciate. They provide;
- Highly liquid options at virtually every strike
- A volatile environment
- Rich premiums
- Short or Long dated expirations
Basically, everything an options trader is really looking for. We need liquidity to initiate and defend a position. That is contributed to by the sometimes extreme (and ever present) swings in share price. And we have options for how to construct our position(s). Maybe we need a hedge in the short term or maybe we’re speculating on the future. Whatever the play, it’s likely SOXL can accommodate the strategy, anytime we’re ready.
How I trade this Unique ETF
I should really say, how I trade this ETF currently. Regardless, I prefer to sell cash secured puts, way out of the money for more than the current asking price. Given the volatile nature of SOXL, any day could be a dramatic red day and I want to be in a trade when the price shock happens. If I’m busy or unable to take a trade for whatever reason, when SOXL dumps, I want to have a trade waiting.
Again, I trade this way out of the money so even if I were assigned the cost would be minimal to my overall account. To explain it clearly, here is a trade I currently have working on SOXL that is pending a fall in price.
At the moment, this $10 strike put is trading for $0.19 at about 43 days to expiration. Per Thinkorswim, I will need SOXL to fall in price to about the $15.50 area, or approximately $2.80 from it’s current price of $18.30 to have this trade filled. Statistically, about a 15% decline. Now, I realize that sounds like a dramatic fall for a sub $20 dollar stock but SOXL is leveraged. As such, the 1 year average daily true range (ATR) is $2.82. So, realistically, it’s not a matter of if SOXL can fall but when it will fall. Should the technology sector have a bad day, I’ll get filled on an option that is over 40% out of the money.
SOXL Risk Factors
Ok, so I’ve purposely avoided many flashing warning signs up to this point. I thought the risk here deserved a section all it’s own. Plainly, SOXL is very risky. Assets don’t just have a current implied volatility of over 100% for no reason. As mentioned, it’s fully possible that as soon as tomorrow SOXL declines by 20%, 40%, or even more. It’s a risk with this one, there’s no two ways about it.
That said, the most misunderstood risk is the daily resetting of leverage. Instead of trying to explain it myself I’ll provide an example from Investopedia that I think makes the point clear.
SOXL Leverage Example
Current SOXL Price – $100
Current Index Price – $100
Day 1 – Index goes up 10% but SOXL goes up 30%
Day 2 – Index goes down 10% but SOXL goes down 30%
On day 1 SOXL would have improved to $130 dollars per share while the index only improved to $110. However, since SOXL must maintain a 300% leverage profile they’ll then need to reset there previous leverage to the new $130 dollar share price. Meaning, now SOXL needs to control $130×3= $390 so that the 300% leverage is maintained.
Now, on day 2 when SOXL falls by 30%, the 30% fall is from a higher asset value. For comparison, the index will rise from $100 to $110 on day 1 and then fall from $110 to $99 on day 2. Marking a total 1% decline in value. SOXL on the other hand will rise from $100 to $130 on day 1 and then fall from $130 to $91 on day 2. Making it’s decline a 9% loss in value.
Hopefully, that makes the risk clear but check out the Investopedia article if needed. In all, this is the biggest detractor from 3x leveraged funds like SOXL and is widely misunderstood. Primarily because of the mathematical complexity. To state it simply, SOXL is volatile and will swing wildly in price.
Final Thoughts
In all SOXL – the 3x leveraged Semiconductor ETF is becoming an attractive option for many of my options strategies. The premium and liquidity just can’t be beat but it does come at a cost.
Still, if you’re an options trader or have been for any amount of time then leverage and volatility aren’t scary topics. They’re market dynamics in motion and tools to be used strategically. If you’re anything like me then you’ll simply construct conservative positions, similar to my way out of the money CSP, that may benefit from these dynamics.
That said, SOXL is indeed not for everyone and I’m certainly not recommending you trade it. Hopefully, this post has highlighted SOXL – the 3X leveraged Semiconductor ETF successfully. If it didn’t then have a look at this short post from ETFinsider.co, “What is the SOXL ETF?”. It should assist in becoming more familiar.
Until the next post.
God bless,
Jeff
