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.

Update

Today my SRS & my FAZ from profitable to be come losses, fortunately my DXO is hedging against it and I suffer a minor loss.  If I set my hard stop loss earlier I would have broken even.  XLF has ran up rather quickly and already reached its 50% retracement from the top of wave 3 of 5.  It is also at the low point of wave 1 of 5.

Financials

I have been follow financials lately since it has its own defined trend and it tends to lead the overall market.  Today we wouldn't want to be holding FAZ in our portofolios as it plunged around 40% today.  Although many are loading up the FAZ but I still think it can go down a little more.  It's currently around $60 a piece.

I was actually anticipating this huge sell off in FAZ sparked by this rally.  Below the blue oval indicates where I bought in FAZ put 80, and the purple is where I gave up when it lost half of its value.  However if I held on to it until today, I would have gotten a gain instead.

Let's review what went wrong, XLF is making lower lows each day and I kept the bleeding going until I gave up.  Notice if price is making daily lows everyday, I would be able to set a safe stop-loss point.  The desired locations are the blue arrows, with stop being previous low.

I personally think the market can head higher these few days so I am waiting for a lower entry on FAZ.

Financials

One we hit the daily 2)EMA, we will prepare for another downturn.

Financials had a nice run today, I am waiting to short it ... I was about to get FAZ puts but was too slow, o well.

My longs held up at the near support

However I have exit my position in EWZ as the chart seems to be the most broken of the 5 and I don't want that much risk going into the weekend.

Financials

I want to show a very interesting relationship, the FAZ, is the triple inverse of the financial index $DJFN, for simplicity let me use the XLF, ETF that tracks the $SPF instead.

We see that in this period of 3 months, XLF had 4 significant tops.  The 3rd top is much lower than the previous two, however the FAZ bottoms are very close to one another.  And it seems to be quite risky to enter it once it is above $40...but gain is substantial if you are on the right side

Financials

Bearish Leading Sectors

Financials, Industrial, Consumer Discretionary

Triple Leveraged Bearish Financial

A huge down day on this while the XLF was up by a fraction of this.  How can this deleveraging be avoided?

Financials

As I had some 3X leveraged short on the financials, but sold all on last last Friday, either wise would made a fortune...

Trades & Sector Leaders

Today I have entered several new bullish positions, on China, Health Care Sector, Biotech.

Market leaders are commodities, biotech & health care.

Market laggers are industrial & financials.

Sectors Reversals?!

As the S&P500 consolidating, some sectors became leading the S&P back up.  These are consumer staples, energy, health care.  Financials & Real Estate had a good run up but were pushed back down afternoon.  I have entered a couple of small positions, bullish in energy & health care via ERX & RXL.

Positions

Right now I have 7 positions opened:

Long:  EUR/USD

Short:  Real Estate, Financials, Energy, Material, Far East Region, Small Cap Index

Real Estate & Financials are the two that are strongly bearish .. 

3X Leveraged ETF's

Direxion Shares is offering a list of 3X leveraged ETF's

BGU/BGZ  Russell 1000 large cap

TNA/TZA  Russell 2000 small cap

FAS/FAZ  Russell 1000 financial

ERX/ERY Russell 1000 energy

DZK/DPK MSCI EAFE Index

EDC/EDZ MSCI Emerging Markets Index

TYH/TYP Russell 1000 Technology Index Index

http://www.direxionshares.com/etfs

Positions

Today I opened several positions, bearish via leveraged inverse ETF's of sectors/regions:

IWM, EFA, XLB.

Along with existing bearish leveraged positions:

IYR, XLE, XLF.

Long position on EUR/USD.

Sectors

The Real Estate index is bouncing around into a huge gain.

The Euro/USD is between its 50-62.8% retracement zone ...

The Energy and the Financials are up but relatively flat during the course of the session

Only 2 of the sectors I am following were bearish today, Health Care & Utilities.

Positions Opened

I have been lazy in updating my blog, today I have opened 3 bearish small positions, with leveraged inverse ETF's.  (SRS, ERY, FAZ) ... 

Why was Goldman Sachs falling when the markets were climbing?

GS is one of the few that went down hard on Thursday while in general the markets were up including financials ... what is going to happen???

AIG & WaMu (WM)

For WaMu, April 14th, 2008 was the last time a bullish signal can be hoped for, from that point and all, all the signals are pointing down.  The moving averages are all in bearish orientation.  There was absolutely no reason that I can think of to be bullish on WaMu.

Now for AIG, the last time the MACD indicator was positive was the beginning of May, 2008.  However the other indicators did not point to a bullish signal, therefore we were not supposed to be bullish at all at this stock, at least nowhere in 2008.  There were actually quite a some short opportunities for these financial stocks.  If you are afraid the risk of a short squeeze when shorting, then you can pay the premium of owning its put option contracts at some out of the money strike prices then all you will risk is the premium you pay for the option contract.

Lehman Brothers Tragedy, how to avoid?

LEHMQ - LEH before kicked to pink sheets

How do we avoid being robbed?  Even when the financial advisors at your bank convince you to purchase their bonds?  When the stock price of a company is shooting down like this, the chances are that their products are not that great.  The last time Lehman Brothers had a daily rise ended in Mid-Feb, 2008.  Let's say you were optimistic about it all the time before, all the indicators stayed bearish after Mid-Feb, 2008 and you have no reason to be bullish to it.