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These New Funds Could Mean Death to Index OptionsBy Jeff ClarkTuesday, 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...
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
Further Reading:
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