Sing along everyone to the tune of “Hooray for Hollywood”

Hooray for Montréal…
Who gave us options on HXU and HXD
Whether trading up or down, enhanced volatility
Guarantees these products will succeed…

Doesn’t really work does it? Something is always lost in translation when I sing in the shower.

Still, soon to be listed options on the Horizons BetaPro Bull (HXU) and Horizons BetaPro Bear (HDU) S&P/TSX 60 fund are welcome additions to the Canadian option family. If US trading is any indication, these options should be very successful. Hopefully, opening the door to more options contracts on other leveraged funds.

What I like about these options is the enhanced volatility inherent in the underlying security. The BetaPro products are designed to move at twice the rate of the underlying index.

Which is to say, a 1% rise in the S&P/TSX 60 Index translates into a 2% rise in HXU and a 2% decline for HXD. Conversely, if the S&P/TSX 60 Index were to fall by 1%, I would expect HXU to fall 2% and the HXD to rise 2%.

This is good news for option traders. With HXU and HDU we have an index based product whose options will have significantly higher premiums than options on iShares S&P/TSX 60 Index fund (Symbol XIU).

Again, looking to the US, at-the-money options on the S&P 500 composite index are trading at a 23% implied volatility. At-the-money options on the UltraPro S&P 500 index (i.e. a leveraged S&P index fund, symbol SSO), were trading at an implied volatility of 46%. I would expect the same numbers to apply in Canada.

What does that mean? Well, the MX implied volatility index is trading at 19.75%. The MX Implied Volatility Index measures the volatility implied by options on XIU. Given that, I would expect HXU options to trade around 39% to 40% implied volatiliy. In terms of premium, if HXU were trading at say $28.35 (where it was at the time of writing), and assuming the 40% implied volatility assumption, the HXU April 29 calls should trade somewhere around $1.50 to $1.55.

In my mind, having an underlying index with enhanced volatility opens the door to some interesting option writing strategies. I would expect that call writing or naked put writing would prove particularly interesting using the leveraged underlying index as the basis for the strategy.

We will look at some specific strategies when the options begin trading.

P.S…. to MJ; you can be sure that I will be front and center trading the HXU and HXD option contracts.