[quote=stockstradr]”futures”
?
But all my money is in 401K and ROTH. I don’t believe I can trade futures, which are distinctly different from options. [/quote]
You can trade futures in an IRA, if your broker permits it. The leverage gained with futures can be staggering. I believe index futures can be leveraged up to 20x intraday and 10x overnight. Your account is marked to market daily, so technically, you are not using margin when trading futures. Using 10x+ “leverage” in an IRA account is a good way to go broke (especially holding overnight).
[quote=stockstradr]I do trade index options and equity / stock options, but for betting on the indexes, at least the leverage with the ProShares ETF’s is conveniently clear: either 1X or 2X, and now others offer the 3X. That is cut and dry. Options are not. Those ETF’s are just managed collections of shorts and option positions anyway.
[/quote]
What is 1x leverage?
The “bear” Proshare ETF’s and those like it do NOT hold short positions (at least not SSO/SDS), nor equity options. They tend to hold index futures and swaps.
The ETF’s are easy to use for typical retail investors, and you are essentially trading futures/swaps contracts indirectly, via a stock (kind of ironic that your trading a stock that is a derivative of a futures contract, which is a derivative of a stock index…).
The 2x and 3x ETF leverage is really just a *daily* performance goal, the actual tracking over weeks/months can be substantially different. I don’t trade futures, but I’m assuming that this tracking issue is less. I occassionally trade the 2x ETF’s (SDS/SSO), as they are fairly liquid & SDS obviates the hassle & cost of shorting, I stay away from the others for the myriad of reasons previously mentioned.
[quote=stockstradr]
My big regret about the options is that obviously I should have just bought the waay out-of-money puts ahead of the big October fall off the cliff. I knew that crash was coming (as did others on here). Many of those out-of-money puts on the indexes were initially priced at $0.10 to $0.50 and some ended up paying even 50:1 returns. Ahh, hindsight is 20:20.
So, yes, there are defnitely situations where it is more efficient to bet with market instruments OTHER than the ProShares ETF’s.[/quote]
I think you’re confusing efficiency with maximum profitability. If your timing is off with a leveraged ETF, you still have an investment, with an option, you may lose all your investment…
I think the point Chris and others have made is that there are more efficient ways to use leverage then just 2x or 3x ETF’s. The alternatives (std. broker margin, futures, options) each have their pros/cons. The primary factors are account type (tax status), position type (long/short), margin interest rate, trading characteristics (liquidity/slippage/trading hours), time premium, amount of leverage, & ease of use.
This is how I view the benefits of each, as it relates to index trading (assuming you have a high probability of success & appropriate risk controls to justify leverage):
*Std. broker margin w/ non-leveraged ETF:
Pros: ~2x overnight, can currently get cheap margin @ <2% per annum. Allows you to buy the most liquid ETF's (SPY, QQQQ) at 2x leverage without the tracking or slippage issues of ProShares. Pays dividends, low expense ratio. Tracks the index exactly, very active options. Ability to use 4x leverage intraday.
Cons: Unable to use in IRA's. Rising interest rates make margin less attractive, shorting ETF's causes additional interest, margin calls.
*Leveraged ETF's:
Pros: Easy to use, just as easy to go short or long, major ones are fairly liquid. No margin interest charged for leverage or on short positions. Pays a dividend. Moderate expense ratios. Able to use them in IRA's, LT cap gains apply.
Cons: May track poorly over time (thus defeating their usefulness), the minor ETF's are thinly traded.
*Options(long):
Pros: Defined risk, ultimate leverage, just as easy to go short (long put), ability to use in IRA's, no margin calls. (LEAPS have additional benefits, including long time horizons, LT cap gains status)
Cons: Time premium decay, time pressure, poor b/a spreads & liquidity (especially ones further from ATM or non-front month), high volatility causes excessive premiums, the more leverage (deeper OTM) - the greater the probability they expire worthless, no dividends, option pricing adds complexity.
*Futures:
Pros: High leverage, very liquid, just as easy to go short as long, ability to trade almost 24 hours, ability to use in IRA's, may track index better then juiced ETF's (at least near expiry), no margin interest, ability to use a fraction of capital to match full investment in cash index (with balance gaining interest, though I'm not sure if FV discounts this). Better ST tax treatment.
Cons: No dividends (though FV may factor this in?), added complexity with fair value, marked to market daily (margin call), LT requires rolling at expiration.
I've never traded futures, so Chris may have more input on their pros/cons & tracking correlation to cash index.
