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Leveraged ETF option strategies: Managerial Finance: Vol 42, No 5

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Options on Leveraged ETFs: By Bill Luby May 29, 8: Or a way to mellow volatile exchange-traded funds? Several readers noted that options on leveraged ETFs seemed like a recipe for disaster - as if no good could possibly come from piling leverage on top of leverage.

While I certainly understand the sentiment, this type of thinking is typical of investors who have little or no experience in options.

To the investor who isn't versed in options, the options world often seems to be limited to an occasional covered call or an out-of-the-money call that's barely distinguishable from a lottery ticket - and seems to pay out just about as often.

In fact, a large percentage of options traders are attracted to options because they're an excellent way to define, limit and manage risk.

Yes, one can buy a put to provide protection for a long stock protection, but in the absence of owning the underlying be it as stock, ETF, index or whatever , options traders are particularly fond of creating multi-leg options positions where the downside risk is known at the beginning of the trade and doesn't waver as long as the position is maintained.

Getting back to leveraged ETFs, I've reproduced a portion of the options chain for FAS --perhaps the most notorious of the Direxion triple ETFs -- in the table below. With a current mean implied volatility of , FAS is a highly volatile ETF. The June 11 calls, which are This is but one example of how options can limit the risk of trading triple ETFs. There are many other potential examples.

The bottom line is that options trades can be structured in such a manner that they're much less risky than stock trades, even if the options are on volatile securities such as triple ETFs.

As an aside, readers may have noticed that up to this point, I've somewhat standardized on the options tools and graphics available through optionsXpress.

Going forward, I'll make an effort do a better job of highlighting some of the tools and content available at various other options brokers in order to illustrate some of what's available to the reader, and at the very minimum, provide more visual variety.

SPXL: The Best Way To Short The Market - Direxion Daily S&P Bull 3x Shares ETF (NYSEARCA:SPXL) | Seeking Alpha

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