How Are SPXU and UPRO Being Traded?
Looking at ways to play the triple ETFs.
One of the points I made is that SPXU could be a substitute for SPX puts (and perhaps artificially depress the VIX as a result) for those who are looking for leveraged ETFs as possible portfolio hedge. To be perfectly frank, I don't believe there will be substantial demand for SPXU (or any of the triple ETFs) as portfolio hedging vehicles, largely related to the issue of the compounding effect (see Understanding the Impact of Changing Market Exposure on Leveraged ETFs from Direxion for more details.)
In fact, when I predicted a bright future for SPXU and counterpart UPRO in The Next Big Thing? back when they launched a month ago, I envisioned 3 primary uses for these triple ETFs:
1. As a speculative short-term trading vehicle, with particular emphasis on day trading
2. As part of various pairs trading schemes
3. As part of the many arbitrage opportunities presented by all the large and growing family of SPX-based derivatives (futures, options, ETFs, leveraged ETFs, etc.)
While I didn't envision SPXU as a viable hedging vehicle, this is largely because I was thinking in terms of a longer time frame for the hedge. If SPX puts can be utilized in increments of the one-month options cycle, SPXU would be at a disadvantage trying to compete on a monthly time frame.
I do believe, however, that SPXU can be a viable hedge for more than just a single trading session or an occasional 2-day sequence. Depending on volatility levels, SPXU hedges can be left in place for up to three days with minimal risk of losses due to compounding. In my opinion, only when holding periods start to exceed 4 days does an SPXU hedge start to become inefficient.
With SPXU already having traded 2.3 million shares as I type this, the success of this product is now assured. While the value of SPXU as a hedging instrument pales in comparison to other possible applications, I do think SPXU can be used as an effective hedge for periods of 2-3 days at a time.
Click to enlarge
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter