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adultswim_antifa t1_iy9j9i4 wrote on November 29, 2022 at 7:34 PM

Reply to comment by pragmojo in Slowly but surely un-fucking myself by awesomedan24

The more frequently the releveraging, the less leverage is safe. If I could borrow at 6% and pay it back in 20 years with interest, there's no limit to the amount I would borrow. But if you relever every day and risk margin call, obviously being levered a million times means you're bankrupt if the market ever goes down slightly once. The 3x ETFs are much less leverage and have much lower fees than what most of you dumbasses are doing with options (that means much less dumb). Long term they're probably on the wrong side of the curve, meaning they will be much more volatile with returns that aren't that much better than the 2x ETFs. Everyone doing HFEA got destroyed this year. They'll probably recover though unlike the option yolo crowd.

Moist_Lunch_5075 t1_iyans1b wrote on November 30, 2022 at 12:03 AM

Exactly this. I use SPXU and SQQQ to hedge my SPY and QQQ positions.

The "10% decay per month" stuff u/awesomedan24 is referencing I've seen come from some fund managers and advisors and sites that reference "back of the envelope" type calculations that don't reflect the actual behavior of the funds but rather some "max leverage/worst case scenario over a long time" type situations.

I mean, yeah... if you hold SQQQ indefinitely, you're gonna lose money. If you hold it during a long term downtrend against a long position, though, you'll be fine.

When I started using my strategy earlier this year, what I found is that the formula for these ETFs is that they work basically on a 1.1x * leverage multiple over short periods of time in both directions, more or less. Basically, the effect of the leverage (with some very minor variance on a day to day basis because of the reset) amplifies the directional bias, and when you're in the correct direction the gains are slightly higher per dollar compared to non-leveraged, and accelerate in the same way on the wrong direction, at around 3.3x

I did long-term TQQQ holding calcs once and IIRC the return was around 2.6x rather than 3x (just buying 3 times the number of QQQ shares) and that matches the probability math around leverage you're talking about.

I also think the idea that these decay so much comes in part from the amplification of losses from movement, which isn't reset decay. Basically, at 3.3x amplification compared to the index, buying TQQQ on a decent decline day against the same capital for QQQ results in 3.3x the decline per dollar, which if you have 3x the capital in it (equal position) suddenly becomes... 10%.

The secret to hedging with this is that you use 1/3rd the capital for the hedged short ETF and keep in mind the excess capital impact when people are swinging longs on a bear run, like TQQQ. It's key to cut the capital exposure to something people are comfortable with in their positioning and it's easy for people to overallocate to leverage.

In reality, though, there isn't a 10% per day decay risk... most of the decline risk is in getting the directionality wrong and in overleveraging. Hell, 10% annual would be way high for decay on these.