Lever up! An analysis of options trading in leveraged ETFs

Journal of Futures Markets, Forthcoming

37 Pages Posted: 28 Mar 2024 Last revised: 29 Mar 2024

See all articles by Collin Gilstrap

Collin Gilstrap

University of Toledo

Alex Petkevich

University of Denver

Pavel Teterin

University of Toledo

Kainan Wang

University of Toledo

Date Written: February 27, 2024

Abstract

We examine options trading in leveraged ETFs and their impact on the performance of the underlying funds. Using implied volatility innovations in call and put options, we demonstrate that option signals from leveraged ETFs are robust predictors of the underlying ETFs’ performance. While both levered and unlevered option signals forecast ETF returns, the levered signal is more pronounced in both magnitude and relevance. This predictivity power primarily stems from inverse leveraged ETFs and during economic downturns. Furthermore, we use the leveraged ETF option signals to develop a trading strategy that produces an average abnormal performance of 1.13% per month.

Keywords: ETF, Leverage, Options, Implied Volatility, Performance

JEL Classification: G11, G12, G13

Suggested Citation

Gilstrap, Collin and Petkevich, Alex and Teterin, Pavel and Wang, Kainan, Lever up! An analysis of options trading in leveraged ETFs (February 27, 2024). Journal of Futures Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4741193

Collin Gilstrap

University of Toledo ( email )

Toledo, OH 43606
United States

Alex Petkevich

University of Denver ( email )

2101 S. University Blvd.
Denver, CO 80208-8921
United States

HOME PAGE: http://https://sites.google.com/view/alexpetkevich/home

Pavel Teterin

University of Toledo ( email )

2801 W. Bancroft St.
Mail Stop 103
Toledo, OH 43606
United States

Kainan Wang (Contact Author)

University of Toledo ( email )

Neff Department of Finance
Mail Stop 103
Toledo, OH 43606
United States

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