Options on LETFs

Abstract

By their very nature, LETF options are risky. They provide a second layer of leverage on top of the already leveraged returns on the underlying LETFs. Options on different kinds of LETFs are actively traded on the Chicago Board Options Exchange (CBOE).¹ In 2013, among the total of about 500 ETFs, on which there were options trading, 102 were LETFs (CBOE, 2013). The most popular options are those on equity-based LETFs tracking domestic, foreign, and different industry sectors. Additionally, there are options on LETFs tracking commodity, fixed-income, real estate, foreign currency, and market volatility benchmarks. Similar to other options, LETF options allow market participants to profit from the changes in the value and/or volatility of their underlying benchmarks. At the same time, they are also indispensable hedging tools in risk management.