Friday, March 27, 2009

Dont overpay for your options on levered ETF's

For those that this is common sence, or "duh" too, then that's is GOOD.
But ya would be surprised

Just something to be cognisant of. (if of course not already)

Let's say one wanted to purchase FAZ calls, as they think its going higher.

Today's current ask:

FAS 5 puts 0.65 ask
FAZ 25 calls 2.80 ask

The reason i picked those 2, was b/c the underlying assets are of course inverse to each other, and the current price is 26% away from these strikes. Well actually one is 25%, the other is 27%, but that's the closest i can find.

So for ease of purpose here, please let's assume that FAS at 6.36 and FAZ at 19.85 are each 26% away from those respective strike (5 and 25). They basically are, within 1%.

So why are the FAZ calls 4X as much?

Well of course the underlying asset is more expensive.

Options writers would MUCH MUCH rather pay out an FAS in the money option, than an FAZ in the money option. (heck its 3X cheaper to pay out the fas!)

Wait, 3X cheaper.......

So why are the FAZ options 4X as much? (considering they are only 3X for the underlying asset)
That's 25% divergence in price!!

Comparing the underlying assets of FAZ to FAS.......FAZ is 3X the value of FAS.
(which in turn means that 3X more PAIN the writers would endure to pay out FAZ, over FAS)

However, ya can get FOUR FAS 5 puts, for the price of 1 FAZ 25 call.
(four, not three)

***Bottom line: Be sure to watch your option prices on levered etf's, and dont overpay 25%.

Just something to watch and be cognisant of and look at when trading options w/ etf's that have long/short versions.


  1. Hi Erik. I love your blog and your analysis. I'm a newbie in options arena so I have a couple of questions. I see in yahoo that the ask price for FAS 5 puts is 0.6. How many of these can someone buy at this price ? If FAS goes to 3 what do you think this put will cost?

    Thank you very much!


  2. Fil,

    .60 = 60 Dollars

    Options are EXTREMLY risky, and require much more discipline than stocks. Total differant animal. Please read up and verse yourself well, and never risk more than you are prepared to lose. A .60 option can go to .05 in a day. Just had to put that out, fwiw, regardless ok.

    is a good site for some reading up on options.

    has a free options calculator to estimate what options will be worth, depending on whatever variable you input, etc.

    Hope that helps...

  3. what a nice post. very clear and thorough

  4. Good observation, Erik. However, Jan, Feb 2009 standard dev(FAZ)=12.31 and std(FAS)=6.27. The ratio of the two std is: 12.31 / 6.27 = 1.96. The ratio of respective coefficients of variation is 2.38. So by this measure we could say that FAZ puts are a better buy than FAS calls. Of course one needs to use all parameters (std, price, time ...) to get the "fair price". After that it's a crap shoot... like everything else in this game :)
    I enjoy your postings here and on the boards

    Keep up the good work!


  5. Erik, you got me curious so I paper traded some FAS puts vs. FAZ calls as close to the same $ value as possible, let's see what happens! Unless the market goes up, we should see roughly what happens, these were april expiry

  6. For the sake of argument, let's assume the market tanks hard before may opex....I know, that's a real stretch (not)

    Let's assume FAZ doubles or triples from its current price of about 20.

    Let's also assume FAS tanks to 1.50, a new low. It is safe to say FAZ would double from here if FAS were to hit 1.50.

    fayed faz 20 may calls asking price 6.20

    faz at 30 means profit of 3.80, or 61%
    faz at 35 means profit of 8.80, or 1.4x
    faz at 40 means profit of 13.80, or 2.2x
    faz at 50 means profit of 23.80, or 3.8x
    faz at 60 means profit of 33.80, or 5.4x

    fasqf fas 6 may puts ask 1.70. Fas at 1.50 means profit of 2.80, or 1.65x
    fasqa fas 5 may puts ask 1.15. fas at 1.50 means profit of 2.35, or 2.04x
    fasqg fas 4 may puts ask 0.70. fas at 1.50 means profit of 1.80, or 2.57x


  7. Four FAS 5 puts vrs One FAZ 25 call?

    let me know what the results are, i do want to know, for conformation.

    Just mathmatically seems like a MUCH MUCH better value to get the FOUR fas puts, but do let me know so its backtested.

    I have em both on my watch list as well, so we can see. (unless the market goes up for the entire month of then we will never know heheh).

    shall see how they look in a week or 2 from now. My strong opinion is the four fas puts will destroy the 1 faz call.

  8. See I think the other tricky thing is the VIX and premiums. Buying puts on SKF or FAZ may not make much sense because even as the price goes up, the VIX is likely dropping along with premiums so you're not getting the same bang for the buck. Perhaps is priced in however. I'm not good with the greeks.


    FAZ calls: 8.70/7.80= +11.54%
    FAS puts: 1.775/1.50= +18.33%

    1st day.

  10. Mark, are you comapring the

    FAZ 25 calls to the FAS 5 puts?

    just making sure....

  11. no, 6 put and 17.5 call. they were both the first ITM strike price so I picked them.