Hello again, what a week! Folks, I’m tired, overwhelmed, fed up, and outright ready to give up. If you’re also feeling this way or have before I hope we both seek and listen to God’s wisdom first. More often than not, His voice is that constant feeling or voice somewhere deep within, telling us what we really don’t want to hear. I know for me, I usually want something easier, something quicker, but He wants what’s best. So, in those moments, hours, day’s, weeks, or years that it all just seems wrong, I hope we both remember this from Acts 3:6, “Silver and gold have I none, but what I do have I give you: In the name of Jesus Christ, rise up and walk”.
With that, I’d like to discuss my top 5 leveraged ETF’s for options trading. A few months ago I wrote a post about SOXL – the 3x Leveraged Semiconductor ETF. Since then, I’ve been routinely selling short puts on SOXL to collect some income. Fortunately, SOXL has continued to move higher and higher so I haven’t needed to own shares. Still, I know the time is coming when SOXL falls and when it does I’ll want to avoid selling puts into the leveraged drop.
Therefore, I needed some additional options I could continue making income even if SOXL wasn’t looking great. That led me to the top 5 leveraged ETF’s for options trading I’ll share with you below. Let’s have a look.
Top 5 Leveraged ETF’s for Options Trading
So I don’t waste any more of your time than necessary, below are my top 5 leveraged ETF’s. First, I prefer SOXL and its certainly on the list but with leveraged shares we must remember, they will fall. The last thing any of us wants is to own them at the top. As I set out to find leveraged ETF’s I’d prefer I had two primary criteria; nothing expensive and nothing decaying exponentially. Sure, on a percentage basis, a 50% loss is a 50% loss but I just didn’t like the idea of tying up thousands into a highly speculative asset. Thus, I kept every ETF on this list under the $50 price point and some significantly lower.
Top 5 Leveraged ETF’s List
| No. | Ticker Symbol | Today’s Price | Description |
|---|---|---|---|
| 1 | SOXL | $43.14 | Direxion Daily Semiconductor Bull 3X ETF |
| 2 | TNA | $48.64 | Direxion Daily Small Cap Bull 3X ETF |
| 3 | TSLL | $19.59 | Direxion Daily Tesla Bull 2X ETF |
| 4 | AMDL | $23.27 | GraniteShares 2X Long AMD Daily ETF |
| 5 | AMZU | $35.75 | Direxion Daily Amazon Bull 2X ETF |
Unfortunately, the list is a bit heavy on technology but that’s where the options liquidity exists right now. In the future, hopefully I can expand on it to be a vastly more diverse group. For now, these are acceptable and meet my minimum requirements. Though, if you’re able to identify some other leveraged ETF’s with good options liquidity I know we would all appreciate you sharing in the comments below.
Leveraged ETF Focus
Rather than break out each individual symbol above I thought it would be more beneficial to highlight a few key areas related to leveraged ETF trading. Sort of a Q & A style section here pointing out some of the risks or advantages they offer. In the next few sections I’ll focus my attention away from the top 5 leveraged ETF’s for options trading and more on each some key benefits or drawbacks.
Primary Advantage to Leveraged ETF’s
First and foremost, leveraged ETF’s offer traders more bang for their buck. Few and far between are the assets available for options traders that offer the level of premium that levered ETF’s provide. Sure, there will always be “hot” stocks that have ample volatility but generally those are more like bubble assets. They will eventually bust and never come back. Maybe leveraged ETF’s are similar but at least leveraged ETF’s have the benefit of history on their side.
In short, leveraged products offer the absolute most short term profit and flexibility I have found. For options traders, like me, who don’t want to commit large swaths of their portfolio to achieve a particular income goal, leveraged ETF’s offer a potential alternative.
Primary Disadvantage to Leveraged ETF’s
Well, to state it simply, the ETF will fall. It’s just a matter of when. Leveraged ETF’s aren’t designed to be long term holdings. Thus the reason the premiums or volatility exists to begin with. Meaning, the real questions are; when will it fall? Are you able to navigate that problem? Personally, I look to what happened in the past and I don’t want to be around when the ETF is in the upper half of it’s long term price range. The risks are real, it’s important to be very careful and ultra selective when playing in leverage land!
Key Benefits of Leveraged ETF’s for Options Traders
Personally, the reason I prefer leveraged ETF’s is the liquidity and premium that exists across the options chain. For example, consider the table below comparing Coca-Cola to SOXL.
| 27 DTE Put @ 10 Delta | Coca-Cola (KO) | 3X Semiconductor ETF (SOXL) |
|---|---|---|
| Open Interest | 331 | 4,326 |
| Probability OTM | 87.48% | 81.71% |
| Current Mid Price | $0.19 | $0.88 |
| Current Share Price | $69.71 | $43.14 |
As you’ll notice, there is both more open interest and more premium available for the leveraged ETF. Now, to be fair KO has more than enough liquidity at other strikes to make it a viable trading option. The open interest was just lower here. However, SOXL offers way more bang for the buck and at a cheaper buying power cost.
Going further, suppose you were happy with the $0.19 offered by KO but wanted to avoid the hefty collateral price tag. With SOXL we could go all the way to the 2 delta put at the $17 strike and still receive more premium. The probability of the $17 strike put being OTM at expiration jumps to 93.07% and provides $0.23 in premium. That’s $1,700 in collateral vs Coca-Cola’s $6,600. The trade off though is potentially owning KO shares vs owning SOXL shares.
Basically, what I’m pointing to here is with leveraged ETF’s we have the option to use our capital more efficiently. For example, in this instance we could sell 3 short puts on SOXL for $0.23 and still use less capital than one short put on KO. More income, less capital usage, but considerably more risk if we’re wrong.
Key Drawback of Leveraged ETF’s for Options Traders
Moving along, the key downside is the other side of the benefit coin. We may have to own leveraged shares. This may or may not be a good decision, depending on the entry price and the state of the market. Leveraged ETF’s, just like there unlevered counterparts can fall, and stay down for years. Couple that with the performance drag inherent to these products and we’re in a real pickle.
Further, and this can’t be overstated, if the underlying ETF, such as Tesla in the case of TSLL were to ever experience a catastrophic 1 day decline it could spell the end for your TSLL holding. Meaning, you’ll lose everything in the investment. As an example, maybe Tesla announces Monday they’re bankrupt, TSLA would crater and thus TSLL. Possibly to a point of no return. Again, the risks to leveraged ETF’s are real even if the probability of occurrence is low.
Final Thoughts
To close this brief post about the top 5 leveraged ETF’s for options trading I think the first thing I can and should say is, BE CAREFUL! Leveraged ETF’s are probably 5 parts risk to 1 part benefit. However, when used sparingly and selectively they can also lift up the bottom line. They give us a benefit of better capital efficiency and more opportunity but only in moderation. Swim out to far, even once, and you might be caught in the undertow.
Personally, having traded SOXL for a while now I can confirm that way OTM is a much more comfortable place to be. Trading SOXL to close to the money just doesn’t settle well, no matter what premium exists. At the end of the day, I don’t want to own SOXL shares or any leveraged ETF’s shares if I can avoid it.
When I attempt trading leveraged ETF options I’m looking for something way, way, way out of the money. With SOXL, the highest strike I’ve traded to date was only $10. I’m much happier only having $1,000 dollars at risk to earn $0.40 in premium than I am to have $4,000 at risk to earn $3.00 in premium.
In all, leveraged ETF’s are just another tool available to traders for use when the time is right. I hope you enjoyed my top 5 leveraged ETF’s for options trading and hopefully a more diverse collection of ETF’s will become liquid in the future.
Until the next post.
God bless,
Jeff
