Inverse ETFs are a great way to gain leverage if you are trying to achieve an excess return that runs counter to the market or just trying to hedge a portfolio. The double and triple leverage can really give you some juice. But how about the options?
Most ETFs offer option plays, and as you can imagine, the double and triples are like playing volatility on steroids. I am very choosy as to which one I would like to play, but the one I have had the most success with is the Direxion Daily Financial Bear 3X Shares (FAZ), the triple financial bearish fund.
I will use the FAZ as a means to make profits and take advantage of short-term volatility. FAZ will move about 3x the opposite of the Financial Select Sector SPDR (XLF) (the bullish side is the Direxion Daily Financial Bull 3X Shares (FAS), which is the triple financial bullish fund).
I have found recognizable patterns in the FAZ that make for some very profitable trading. However, if you venture into this type of trade, you have to define your risk. Options do this for you. Also, you would need to withstand some volatility and be willing to accept losing a large amount of your investment, if not all of it. When the FAZ is ramping, that is when I want to play it. When it is falling and has lost momentum, I'll stay away.
The charts below show what I'm looking for from a daily and intraday standpoint. I don't hold the option for very long -- at most a few days, and sometimes for a day trade. When the momentum is strong, there is no denying the FAZ.
For the present, it appears to be gearing up for a big consistent move. Now, headline news is the wild-card factor, and anything positive with financials can drop the FAZ's momentum in a New York minute.
We have had some pretty decent success with this vehicle, as the FAZ was the key to getting the upper hand during a very rough period. We posted these trades and ideas on the Real Money's Columnist Conversation last September, when we crushed it for a massive triple-digit win not once but twice. Caution is always warranted, but these vehicles offer some great trading profits if timed correctly.
Mind you, I will buy this for a short-term trade. This is nothing that I want to stay in for any considerable amount of time.