Put volumes swelled in iShares Russell 2000 (NYSEArca: IWM) yesterday, with nearly 500,000 contracts changing hands. This has been fairly prevalent for the past several weeks as institutional portfolio managers are likely hedging small cap longs in portfolios on the way up.

In other cautious looking activity, ProShares UltraShort S&P 500 (NYSEArca: SDS) calls were fairly active yesterday, and it is possible that these participants are aggressively hedging equity longs here, if not outright speculating on a reversal in the midst of earnings season. SDS has an expense ratio of 0.95% and IWM has an expense ratio of 0.28%.

SDS is designed to provide two times the daily inverse return of the S&P 500, but the word “daily” needs to be underscored and emphasized.

This is because the leverage within the fund resets daily, and as a result of daily compounding and potentially choppy markets, it is very possible to be directionally “right” in terms of when the position was established in such a fund, but “wrong” in terms of losing money on the ultimate trade due to the constraints here of daily leverage.

That said, on the flipside when the trend strongly agrees (and in short order) with the directional trade in the leveraged inverse product in this case, it is possible to realize short term returns in excess of the stated daily two times inverse target return.

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