OK, this is an options trading blog, but I’ve been obsessed lately with these 3x levered ETFs and how much they move intraday.  Just last night I was up until 3:30am researching price patterns and paper-trading it in my mind with various intraday indicators that I like, mainly the CCI.  Particularly, the most volatile is the FAZ, a 3x levered ETF which shorts bank stocks.  This thing moves 20-30% intraday quite frequently!  With that kind of volatility this is day trader candy!  I also noticed something interesting: it gaps up or down overnight about 10% each day!  So at the end of the day if you can guess which way it’s going to gap open the next morning you get a nice 10+% move by putting on a trade at 3:55pm EST and taking it off shortly after the market opens.

Since this is an options blog, I have to consider some sort of options play on FAZ.  Looking at the chains the options are pretty pricy since they are so volatile.  I’d hate to short anything in here since it moves so wildly and I don’t like shorting options on levered ETFs because of their bias towards intraday price correlations: over longer trends they do not correlate to the movements of their underlying stocks very well, only on a shorter term basis.  I think one interesting idea is to consider trading these during expiration week, where you’re paying for less theta and just speculating up or down on their short-term price movements, or maybe short some options a few days before expiration that are still a fair amount out of the money so they expire worthless.  Still, this one is a scary beast to play with.

In the meantime, I’ll be looking more into this constant overnight-gapping phenomena and see if I can get good at picking which direction it’s going to gap.  I picked DOWN last night and I was right, it gapped down on the open about 11% from yesterday’s close after the first minute of trading from $56 to $50.