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Trading Google Earnings With Leveraged ETFs

ETF Professor

The earnings parade in the technology sector—the largest sector in the S&P 500—continued Thursday, when Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOGL) reported its third quarter results.

Many people trade stocks in the leadup and follow of an earnings report. But ETFs are becoming an increasingly popular vehicle for traders who crave the drama but not the volatility provided by earnings. This is because, unlike stocks, ETFs won’t move as much on a specific company’s news item.

In this scenario, a leveraged ETF could provide a great short-term trading opportunity because they magnify short-term moves.

A Play For Bulls

Enter the Direxion Daily Technology Bull 3X Shares (NYSE: TECL). TECL seeks to deliver triple the daily returns of the S&P Technology Select Sector Index. Of course, a trader can use TECL for downside by shorting the ETF.

As of October 24, the Class A and Class C shares of Alphabet made up 10.8 percent of the index's weight, meaning a 10 percent move in Alphabet will move the index by approximately one percent and the ETF by three percent.

A Play For Bears

For the opposite site of the trade there’s the Direxion Daily Technology Bear 3X Shares (NYSE: TECS). TECS targets performance of three times the inverse of the S&P Technology Select Sector Index. This means a one percent drop in the index causes approximately a three percent gain in TECS.

Just like TECL can be shorted, bullish investors can short TECS to get upside on a positive price movement in Alphabet.

Earnings Trends

“So far, on the earnings side, 79% of the S&P 500 companies that have reported have beaten expectations and only 16% were below expectations. Sixty eight percent beat revenue expectation with just 30% below expectations. For contrast in Q2 of this year, 64% and 50% of companies beat on earnings and revenue respectively at this stage of earnings season,” according to a recent note from Direxion.

Again, an earnings report, particularly one that will be as widely anticipated as Alphabet's, makes for an ideal time to trade a short-term instrument such as a leveraged ETF. Traders that are long Alphabet shares or call options heading into the report can hedge that exposure with TECS. Conversely, traders that have already established bearish positions in Alphabet via put options or an outright short of the stock can hedge for a day with TECL.

Anybody trading these ETFs should remember that to obtain the necessary leverage, ETFs such as TECL and TECS reset daily, so returns over holdings periods of more than a day do not always reflect those of the underlying index.

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