In previous posts, How to Trade the CNBC Million Dollar Challenge (Part 1), I discussed how to use leveraged ETFs to trade the market volatility. I discussed using two ETFs that track the S&P 500 but are levered to return twice (200%) of the daily performance:. (1) Proshares Ultra S&P 500 (SSO) and (2) Proshare UltraShort S&P 500 (SDS). In How to Trade the CNBC Million Dollar Portfolio Challenge (Part 2), we did the same with the NASDAQ 100 using ProShares Ultra QQQ (QLD and ProShares UltraShort QQQ (QID).
Today, we will add a new inverse pair trade using the volatile financial sector. The Direxion Daily Finan. Bear 3X Shs (FAZ) is the short ETF. The investment seeks daily investment results of 300% of the inverse of price performance of the Russell 1000 Financial Services Index. The fund normally creates short positions by investing at least 80% of net assets in financial instruments that, in combination, provide leveraged and unleveraged exposure to the index. The inverse ETF, Direxion Financial Bull 3X Shares (FAS), is the long position for when the financials are moving up. The investment seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell 1000 Financial Services Index.
The CNBC Portfolio strategy is to buy the ETF, FAS or FAZ, based on the movement of the the Russell 1000. At the market close on 10/4/2011, the market rallied in the last hour of trading. The FAS went from $8.60 to $10.20 in less than one hour. This is an incredible increase of 18.6% in less than one hour! In comparison, the FAZ went from $80 to $67, a decrease of (19.4%) during the same time. You can see the amount of gain you can get from being in the right leveraged ETF when the market makes a dramatic swing up or down. The chart below compares the FAS to the FAZ over the last 3 months. As you can see, these ETFs move in exactly opposite directions.
For your CNBC Portfolio, you should be invested in the SSO or SDS for one trade; the QLD or QID for your second pair trade; and the FAZ or FAS for your third trade. You can adjust these positions as necessary to stay with the levered ETF moving with the market direction for each index tracked by the pair trade. This is an excellent trading strategy to win the Million Dollar Challenge and the weekly prizes.