XLF vs FAZ

FAZ is a leveraged inverse ETF of the Russel 1000 financial index, for simplicity, we will use the S&P financial index tracking ETF XLF.

We want to examine trade-offs between options of these 2 tickers.  Let us look at the Apr 2009 options for both.  Since the financials is in a short-term down trend, let's compare the XLF put vs FAZ call options:

Volume

  As of the end of the week the closest strike price option:

    XLF - Apr Put 8 premium $0.79 volume 23877

    FAZ - Apr Call 35 premium $7.70 volume 1339

Say we opened a bearish position on financial too early, we bought in at the open of Tues Mar 17th, 2009.  XLF Apr put 8 had price about $0.95, while FAZ Apr call 35 had price about $12.50.

On Thu Mar 19th, 2009 open say we had enough pain and sell these at a loss, XLF Apr put 8 was priced around $0.40 and FAZ apr call 35 had price about $4.00

Now let's say we did not close the position and waited for a reversal.  As of Friday's close their prices are $0.79 & $7.70 respectively.

In period 1:  XLF changed -58% falling from $0.95 to $0.40 per contract.  

                   FAZ changed -68% falling from $12.50 to $4.00 per contract.

In period 2:  XLF changed 97.5% rising from $0.40 to $0.79 per contract.

                   FAZ changed 92.5% rising from $4.00 to $7.70 per contract.

Combined period:  XLF Apr call 8 lost $0.16 (16.8%) and FAZ Apr put 35 lost $4.80 (38.4%)

While XLF the ETF itself went from $7.80 to $9.60 to $8.14, a net of -4.18% on the short side.  The FAZ ETF went from $45 to $23.88 to $ 35, a net of -22%

Supposed we open a FAZ contract, representing 100 shares @ $45, shares total $4500.  Since this is to perform -3X of XLF, so I would need to short $13500 woth of XLF in order to get the similar performance. 

Approximately 17 contracts are needed @$0.95 = $1615, after period 1, it was down to $680 and back to $1343, losing $935 in period 1 and $272 in combined period.

For the FAZ contact, during period 1 it lost $8.50 from $12.50 to $4, in the combined period it lost $480.

It looks like FAZ lost less when it in opposite trend and gain less when it reverses.  However the main reason was that the strike price of 35 was $10 deeper in the money than the closest strike price call option.

Bid/Ask Spread:  FAZ Apr call 35 has current spread of $0.20 while XLF Apr put 8 has current spread of $0.05, if we purchase 17 of these, the total lost on spread will be $85.  Plus $16 higher in commission eacy trip.