In early 2014, the term “polar vortex” entered the investor lexicon. A deep plunge in temperatures across both North America and Europe led many investors to a “high-conviction” trade. The low temps, many realized, would lead to a massive spike in natural gas consumption—and natural gas prices.

When most people think of such high-conviction trade windows emerging, the venue of choice is often the options market. And when natural gas prices spiked five winters ago, investing in natural gas futures paid off.

But for some investors, leveraged exchange-traded funds hold greater appeal than options when these short-term trading windows open up.

Troy Bombardia, a trader and founder of Australia-based, is clearly in the leveraged ETFs camp. He thinks these ETFs offer a benefit that options lack. “You can always hold your position until you are right, as long as the market’s main underlying trend supports your trade,” he said in an e-mail.

In contrast, options contracts can expire worthless if the expected market move fails to materialize within an expected time frame. Moreover, if the market initially moves against a position, an options trader may face a margin call.

Bombardia pointed to the U.S. stock market rout in the summer of 2015 as an example. He noted that an options trader would have “had to liquidate his position at the bottom of the August 2015 decline (fire sale). The ETF trader? He hung onto his position despite the 50% crash. His 50% loss stung badly, but he would have eventually made a lot of money when the market recovered in 2016 and 2017.”

And leveraged ETFs can also perform better than expected when the trend is in sync with your position. An example he cited is the ProShares UltraPro S&P500 fund (UPRO), which is designed to produce 300% of the index’s daily performance. You would think this “3x” fund would rally 60% when the S&P 500 rises 20%. Yet Bombardia points out that the fund actually rose 72% in 2017, even as the S&P 500 rose 20%.

“Going long leveraged ETFs is ideal when you think that the market will rally in a steady manner,” Bombardia said.

A Quick Primer

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