Concentration of Sophistication in Options on Leveraged ETFs?

Does pricing of options on leveraged exchange-traded funds (ETF) predict future returns of the underlying 1X ETFs? In the March 2024 version of their paper entitled "Lever Up! An Analysis of Options Trading in Leveraged ETFs", Collin Gilstrap, Alex Petkevich, Pavel Teterin and Kainan Wang examine options trading in leveraged equity ETFs and its implications for future performance of underlying funds. They hypothesize that the compounded leverage of such options attracts especially sophisticated investors. Specifically, they test a risk-on/risk-off strategy that, at the end of each month:

1. Calculates the difference in changes in implied volatilities between at-the-money (ATM) call options and ATM put options on a leveraged ETF (and separately for comparison, on its underlying 1X ETF).
2. If this difference is greater (smaller) than its median value over the prior 12 months, specifies the next month as bullish (bearish) for the 1X ETF, and invests in a synthetic 3X ETF (the risk-free asset) next month. The synthetic 3X ETF earns three times the monthly returns of the underlying 1X ETF.

They also consider a more realistic test using SPDR S&P 500 ETF (SPY) as the underlying 1X ETF and Direxion Daily S&P 500 Bull 3X Shares (SPXL) as the associated leveraged ETF. They assume 0.2% trading frictions for portfolio turnover. Using daily returns for 76 leveraged equity ETFs matched to 30 underlying 1X ETFs and daily implied volatilities for associated ATM call and put options during January 2007 through December 2021, they find that: