How can traders take advantage of leveraged ETFs without a huge capital commitment?

How to Trade Leveraged ETF Options

Cut out the middleman and do as the indexers do, trade options on the ETFs. The "ultra" funds return two or three times the daily return than a normal ETF. Inverse ETFs can achieve the same goals as a straight out short position without consuming nearly as much margin.

Worriers Welcome. Direxion Inverse and Leveraged ETFs | Direxion

What is an ultra ETF? It is an ETF that uses leverage. The ultras also save capital because double or triple the movement can be achieved with the same initial outlays. Leverage is a double-edged sword, however.

If the ETF moves against the trader, more capital needs to be placed into the account. It is similar to a futures trade, but the ETF is trading the spot market and it does not have the same leverage as your typical futures contract.

Lehman Brothers ProShares offered the first ultra ETFs in , with the introduction of its Ultra ProShares. For instance, ProShares Ultra QQQQ is an ETF that aims to double the performance of the NASDAQ on a daily basis. Smaller returns in a sideways market have a harder time achieving that same target.

The inverse ETF exists for the goal of profiting from a decline in the value of an index. Trading in an inverse ETF is the same as an outright short of the ETF.

For instance, a trader could buy PSQ instead of shorting QQQQ. By purchasing shares in QID, a trader can get double the exposure to the downside. Are these ETFs the best way to leverage your returns in either an up or down market?

The creators of ultra and inverse ETFs use options to achieve their desired results. Traders can cut out the middleman by trading options on QQQQ themselves, rather than trading QLD, PSQ and QID.

QQQQ makes the same movement up to The downside risk on the ultras is unlimited until it hits zero. As far as inverse ETFs are concerned, buying PSQ is preferable to shorting QQQQ because only two-thirds of the capital is required.

Inverse and ultra ETFs are nice trading tools, but are not nearly as effective as trading the options on the main ETF itself. While leverage is a double-edged sword, it is always better to have more control of your capital at risk. Dan Keegan is an instructor with the Chicago School of Trading. Reach him at dan thechicagoschooloftrading. Dan Keegan is an experienced options instructor and founder of the options education site optionthinker.

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Election play in gold options. Trading options on inverse and ultra ETFs FROM ISSUE. About the Author Dan Keegan is an experienced options instructor and founder of the options education site optionthinker.

A Netflix butterfly spread. Diversify risk with crisis alpha. Writing success Volatility slides. Previous Diversify risk with crisis alpha. Next New For Traders: Related Terms options Lehman Brothers ETFs Dan Keegan 18 Capital 15 Chicago School of Trading 10 QQQQ 2 QQQQ 1 QLD 1 PSQ 1 QID 1 Inverse 1 Ultra 1 QID 1 QLD 1 PSQ 1 nice trading tools 1.