‘There’s Only One Way I Know to Avoid Leverage’ – But Should You? In Defense of Leverage with Our ETF Expert

I’ve been covering the options market since before there was a Great Financial Crisis, and no one will ever convince me that leverage is a bad thing.

In fact, it is written across my heart that “leverage” is one of the primary benefits of options trading, since buying a call option affords you control over 100 shares of the underlying asset at a fraction of the cost of buying those same shares outright.

And even if you hold that call option, white-knuckled and clammy-palmed, all the way through to a 100% loss at expiration, your loss will have been clearly defined the entire time to the initial premium you paid upfront.

But what if you win?

Let’s say you’re right, and the underlying stock moves the way you expected. Thanks to the power of leverage, your call option means that you can capture a percentage gain much, much larger than a shareholder would on that very same stock price move.

Without being too grandiose (this is still the grimy casino of the stock market we’re discussing), that kind of leverage can provide the democratizing power to help build small accounts into bigger accounts…

…when it’s wielded correctly.

• The Trillion-Dollar Borrowing Binge Lifting the Stock Market to Risky Heights – The Wall Street Journal, June 28, 2026
• People Are Worried About Stock Market Leverage – Bloomberg, June 29, 2026
• Minister apologizes as Korean leveraged ETF investors nurse heavy losses amid chip stock rout – CNBC, July 29, 2026
• Jamie Dimon warned that market leverage is at record highs and could trigger disruption – Quartz, Aug. 6, 2026
• The money investors borrow to trade in the U.S. stock market is at an all-time high – NPR, Aug. 14, 2026

As with most powerful weapons, cautionary tales about leverage – like the story that developed out of South Korea’s stock market this summer – typically stem not from the existence of the tool itself but from the manner in which it’s handled, and with what degree of care and respect.

So when I hear celebrity investor Michael Burry, of “The Big Short” fame, say some absolutely meaningless fortune-cookie garbage like:

“Avoid the leverage, and one is more likely to avoid the folly.”

…I immediately transform into Tom Cruise on the TODAY show circa 2005: 

Mike. Mike, Mike, Mike – you're glib. You don't even know what leverage is.

Let’s talk to someone who does.

Rob Isbitts, our ETF columnist, has been following the narrative ties that bind semiconductor stock momentum, the exchange-traded industrial complex, and South Korea’s hyperleveraged stock market for months now.

He’s an ideal counterpart for me here, because Rob has lived through a number of market crashes and tends to invest as though the next Big One is right around the corner – which is a good way to prevent a proverbial piano from falling and crushing your portfolio on the sidewalk.

Conversely, although I have navigated through multiple market crashes myself (flash and otherwise), I remain firmly convinced that even as we hurtle inevitably closer to the rapidly approaching heat death of our planet, the stock market will almost certainly be at all-time highs when we get there.

Here’s our discussion on leverage, psychology, and the best ways to play defense before the calendar turns to a historically wild time of year for stocks.

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What We Mean When We Talk About Leverage

“Define leverage first, and that will help,” suggested Rob.

“Well, I can’t ask Michael Burry, so I’m asking you,” I told him, and we both laughed.

But I don’t know you all well enough to be quite so glib yet, so here is my best attempt to define a complicated topic: leverage.

I’ve mentioned options, which allow you to leverage a stock’s move by risking a smaller amount of capital than you normally would to reap a potentially greater return.

And then there are leveraged ETFs, which are vehicles designed to deliver a daily trading return that amplifies the performance of some underlying asset – like an index benchmark, or a single stock (think 2X Nvidia, or -2X QQQ) – either to the downside or the upside.

In its Aug. 10 report on leveraged ETFs, Bloomberg says this leverage comes in 2 forms: “ETFs tracking broader indexes, where AI stocks have gained weight, and single-stock ETFs targeting many of the same names directly.”

On June 24, Rob wrote about the heavy weighting of AI stocks among everyday ETFs that come in regular unleveraged wrappers:

For years, trillions of dollars in passive index inflows and momentum-chasing capital have been forced into a tiny, elite circle of chipmakers. This has created a feedback loop that I’ve referred to here before as the “passive flow trade,” a phrase I borrowed from Simplify Asset’s Michael Green, who has studied the indexation of the S&P 500 ($SPX) for a long time. 

As these stocks’ prices rise, their market cap weight inside major index products expands, forcing the next wave of automatic 401(k) money to buy even more shares. But this has pushed momentum indicators to levels that historically precede cyclical bear markets.

In short, the biggest stocks in cap-weighted ETFs will almost inevitably get bigger over time because they get a bigger piece of every dollar allocated – which impacts bog-standard funds like the SPDR S&P 500 ETF (SPY), Invesco QQQ Trust (QQQ), Vanguard S&P 500 ETF (VOO), and more.

At the highest level, there’s margin debt, which is the money that investors borrow to invest in securities.

"There's a lot of margin debt you don't see because it's not called margin debt. It's called other things,” said JPMorgan CEO Jamie Dimon in an early August CNBC appearance – and he included ETFs in his “other things” bucket.

Given all of that, “can we really avoid leverage?” I asked Rob.

“The way the markets work now, the leverage is inherent because of what I write about all the time: algorithms and indexes,” he said. 

Of course, you can avoid leverage by opting out of markets entirely, if you like:

“I mean, you know, avoid the leverage by sitting in cash?” suggested Rob. Otherwise, “there's only one way I know to avoid leverage, and it's position sizing.”

On a practical level, he told me that amounts to managing your capital allocation strictly, and with a sharp focus on risk over reward:

“If I don't put more than 5% at risk, even if I go away for a month and don't look at the market – which will never happen – then there's only so much I can possibly lose,” explained Rob. “Traders can use as much leverage as they want, provided that they can fill in this blank up front: ‘The most I can lose, in a hypothetical parade of horrible scenarios, is [X] dollar amount, and I am comfortable with that.’

“That's my whole philosophy on leverage, and it applies to everything else we're going to talk about.”

How to Play Defense… With Leverage

It’s easy to make leverage sound inherently dangerous, especially when it comes baked right into an exchange-traded fund.

Bloomberg reports: 

Somewhat counterintuitively, inverse funds can also be required to trade in the same direction as their underlying security. After a rally, a bearish fund has lost capital while its short exposure has grown relative to the money behind it. To restore its target multiple, it must buy back part of that position…

“The options lingo is ‘short gamma’ but the simple point is that big moves tend to beget other big moves,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “Any big move of the underlying has a subsequent exacerbating effect.”

Or, as Rob said to me during our conversation, “Leverage always pops the bubble.”

Isbitts himself wrote for this site on Aug. 8: 

When single-stock leveraged ETFs launched in South Korea this past May, retail investors jumped in aggressively. By July, these leveraged products and their underlying stocks represented 70% of total daily trading volume on the local exchange…

American counterparts shouldn’t view this as a distant anomaly. In the U.S., leveraged ETF assets under management have surged 60% since March to a record $218 billion. While they make up just 1% of total ETF assets, they now generate 40% of all U.S. ETF trading volume.

…which sounds an awful lot like a warning.

But even if we could avoid leverage, and even if we do have a big pile of Scrooge McDuck cash to hide out in – is that really the best idea? 

“If you can't avoid leverage, do you want to lean into it and use it as a defensive tool?” I asked Rob.

It was a trick question, of course, because I know he does. But I did have serious reservations about using leveraged ETFs for this purpose, and I thought this would take us on the path to answering them.

My plan was to ease us both into the conversation with an options collar trade idea he had previously covered at Barchart.

In early July, Rob wrote of the iShares MSCI South Korea ETF (EWY):

That chart of EWY looks terrible…

There are several ETFs you can use to profit from a decline in the memory industry, as well as emerging market inverse ETFs like the ProShares Short MSCI Emerging Markets ETF (EUM). But since EWY is also quite liquid, an option collar is another consideration. Here I show what it looks like out to the start of 2027, with the put strike fixed at $180. As we see, there’s 2:1 upside/downside potential across several call strikes.

It was a very, very good idea.

Elizabeth Volk: I was struck by the EWY collar just in terms of the timing, because it was – really, it was the week before it kind of broke below 180. 

I know you're always looking at the PPO. Was that another situation where the percentage price oscillator (PPO) tipped you off? Or how did you line up your collar around 180 there?

Rob Isbitts: 180 to 142 in three weeks. Wow, it took that long. But that's, what – that's 20%.

The daily PPO got all the way down to the point where it looked like it was potentially going to be a death plunge. Of course, if this thing all goes to hell, at first I want to not lose; I want to neutralize my downside – but if there's a bubble, I want to participate in the bubble. 

This is very much a prototype – what do you call it? – it's very representative of what I see all the time. Because you can master leverage, but the market has to cooperate. 

So this thing went from poised, in position, to – as we know now in hindsight, three weeks later – 20% down, it was over. The short move was over, and now it's back up.

Well, great. I'm glad I stuck with it. It's also gone nowhere in three and a half months. If you're a trader, that's a little disappointing. 

That’s where I think leverage can start feeding your endorphin rush. The problem with leverage is it speeds everything up so much. And I think it starts to make you think sometimes that you're more right than you are. 

Case in point, the SpaceX thing. One day: 14% decline. And I was like, “I can't do any better than this. Look at how much money I made in a day. I'm out.” 

It became my best and dumbest trade of the year. That's what leverage does, which is one reason why psychologically a lot of people can't handle it. 

And I made some money, but that's why I think simply saying “leverage is bad” – that’s too binary for me. It's not bad, and it's not good. It's something to consider depending on who you are, how much time you have, where is the rest of the portfolio, et cetera.

EV: I’m an options trader. Why would I ever use a leveraged ETF instead of just buying a call or a put option?

RI: There's no one right way. A lot of times I'd rather use options, because then I really know that my loss is limited to what I put up when I buy options. 

But if the options are way too expensive, the next best thing is that leveraged ETF.

The number one reason I even came upon and started looking for something like SOXS was that I wanted to do what I usually do, which is buy convexity – cheap, out-of-the-money put options on Micron or on the semis. 

Not because I thought they were going down, but because I always want to have my cake and eat it, too.

So I tend to combine a normal position in the stock or ETF on the long side where I’ll buy shares, and then leverage it on the short side with put options. Not always, but… you know, I'm always skeptical.

I’ll interrupt Rob very briefly here to explain SOXS, which is known to the uninitiated by its government name, the Direxion Daily Semiconductor Bear 3X ETF (SOXS). It’s designed to deliver daily returns that are triple inverse those of the PHLX Semiconductor Sector Index, which is popularly proxied by the iShares Semiconductor ETF (SOXX).

The top 10 holdings in SOXX include a murderer’s row of mega-cap players in the artificial intelligence chip story, including Nvidia (NVDA), Micron (MU), AMD (AMD), Marvell (MRVL), Taiwan Semi (TSM), and even Intel (INTC). Together, these giants account for 60% of SOXX.

So if you thought the bullish narrative was overdone and wanted to go short on all of these chip stocks without trying to “pick a loser,” so to speak, you could simply buy SOXS. It’s designed to go higher when these titans of the industry take a dive.

You could also theoretically use SOXS to hedge a slate of long equity positions in these names, which many investors have likely accumulated over the course of this decade.

But again, why would you, when put options exist?

I’ll let Rob continue:

RI: I love to buy put options, but they're so darn expensive. 

So, what do I do instead? Something that simulates the form, where I’m getting my long exposure and my downside protection. Call it hedging, but I want my offense and my defense. 

To be clear, “expensive” here is in volatility terms. 

Implied volatility (IV) is a major component that impacts options pricing, and IV can be pushed higher by speculative trading frenzies, market expectations for big price swings, surging retail trading volume, anxiety about an imminent sector crash… pretty much everything that’s happening with semis right now.

When option premiums are bloated by high IV, buyers of those contracts need an even greater price swing to profit. Most often, though, they get chewed up and spit out by time decay.

That’s why Rob wrote on July 19, “At a time of sky-high volatility in this industry, put options are essentially off the table for me.”

That’s where SOXS comes in – and on the long side, its counterpart, the Direxion Daily Semiconductor Bull 3X ETF (SOXL). In late May, Rob wrote of overpriced Micron call options: 

When you buy a 3X leveraged ETF instead of an option, you get the dramatic asset acceleration you want without a ticking clock. There is no expiration date, and you aren’t paying a massive volatility premium to an options seller. You are effectively capturing structural, amplified momentum through a liquid equity instrument.

But like any leveraged asset – any market exposure at all, really – Rob warns us to keep our exposure manageable.

Of SOXS, he wrote on June 24:

I treat it more like placing capital in an option expiring 3-6 months from now. I use a fraction of the size of my position if I were using SOXX instead, in a bull market cycle.

And yes, despite the official recommendations of ETF issuers, the impish subtext you’re reading into Rob’s commentaries is correct: He does in fact hold these leveraged ETFs for periods far longer than the suggested one-day holding period, and particularly the high-yield inverse bond funds he uses to hedge his favorite bond ladder strategy.

“It's like a surgeon general's warning,” he told me.

“Do you think they're kind of encouraging you to overtrade a little bit with that, or are they really just covering their risk because they know that the underlying structure of these funds is kind of designed to lose money over time, with the ongoing swaps and futures rolls?”

“Boy, it's hard for me to get in the minds of those folks,” said Rob diplomatically. “I will tell you as an investor, I've been taking this opportunity, and I think other people should too.”

Before we moved on, I took one final swing in defense of my beloved put options:

EV: Can you still implement a collar strategy for protection when IV is high? 

RI: Yes, because when volatility is that high, it makes it easier to use the sold call option to pay for the put protection.

I would take the concession. But he made some good points about leveraged ETFs and IV, too.

Actually, Maybe Cash + Leverage Can Live in Harmony

After we deconstructed the summer of volatility that spiraled out of Seoul’s semiconductor trading frenzy, Rob reassured me that it could absolutely happen here.

“Whatever’s going on right now, this is spring training,” he said, and pointed to ominous autumnal seasonality for markets as one reason to be concerned.

Also: “I heard there’s an election,” he deadpanned.

And of course, there’s ample evidence to make the case that, yes, U.S. markets certainly look at least a little euphoric right now.

So how would Rob hedge against a possible disaster?

As it turns out, he just might take a Burry-style cash hoard and smash it headfirst into the mega-leveraged ProShares UltraPro QQQ (TQQQ), which targets 3x the daily returns of the tech-heavy Nasdaq-100 Index ($IUXX).

“Cash is still yielding close to 4%,” said Rob, describing the approach as a “cousin” to his SPY-BIL 2-ETF strategy. “If I can get 4% for an extended period of time – maybe I’ll pair TQQQ with cash. Cut out worst-case scenarios, but use leverage on the upside.”

Any final thoughts on leverage to tuck inside the fortune cookie, Rob?

“One of my favorite uses of leverage is as my ‘I know I can be wrong’ insurance,” explained Rob. “Psychologically, a lot of people can’t handle it. But leverage is not bad, and it’s not good. It’s something to consider.”

– This interview has been edited for length and clarity. You can follow Rob Isbitts at ETFYourself and ROAR.PiTrade.com, and explore ETFs at Barchart.