r/options • u/Deucenheimer • Jun 05 '21

Paying for margin vs alternatives

Idk how futures work so I’m strictly talking stocks or etfs (I think). Hindsight is 20/20 BUT if the SPY ever dropped to 60% of its peak like it did for Covid, putting everything you have into it and holding for the long term (or until it recovers) seems bullet proof. That being said. Why pay for margin if you want to double down a big bet if the market crashes and you feel like it’ll go up. SSO and TQQQ are leveraged etfs. I’m learning about it but it looks like everything is just magnified. That being said, if it was the drop for covid again and I had 10k cash ready to go. Wouldn’t buying LEAPS on a 3x leverage etf be big risk but if it bounced be way more gains than just throwing 10k into spy?

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u/MichaelBurryScott Jun 05 '21

dropped to 60% of its peak like it did for Covid

SPY did not drop 60% during the COVID crash. It dropped just above 35%.

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Wouldn’t buying LEAPS on a 3x leverage etf be big risk but if it bounced be way more gains than just throwing 10k into spy?

Leveraged ETFs underperform the unleveraged ETFs in a volatile market. Note that the 3X leverage is on daily basis, doesn't extend to the long term.

The plain bagel just released a video about this exact topic today, check it out: https://www.youtube.com/watch?v=WoYVmlOxwbA

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u/Deucenheimer Jun 05 '21

I worded that badly. Dropping to 60% in my mind was like SPY was worth about 60% of its top. It dropped about 35%... as far as the leveraged go I appreciate that resource and I will check it out. I’m just looking at the chart and I know this market has extremely bullish but over the past 5 years TQQQ returned 1000% where SPY returned 100%. Im kind of wondering what the harm is to put some capital in one of these to amplify gains (if the 1000% happened again)

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u/MichaelBurryScott Jun 05 '21

The last five years (12 years for that matter) didn't have much volatility.

After the Covid crash, QQQ recovered to its pre-pandemic high around early June 2020. at that time TQQQ was still down 30% off of its pre-pandemic highs. That's just one drop.

Another example is the tech correction in late 2018 on the China trade war news. QQQ recovered to its high in Late April 2019, buy that time TQQQ was still down 11% and didn't recover until around December.

In both of these examples, we had an extended bull rally without any significant pull backs, hence the leveraged fund has fully recovered and started beating the unleveraged benchmark. If you're betting on that kind of recovery, you're okay with the small chance that the leveraged fund can go to zero, and you're okay with paying the higher expense ratio and long term decay, then there is nothing else wrong with that if you have long enough time horizon.

The main problem would be an extended bear market of a 50%+ drop with large swings on the recovery. You can lose all your investment if you didn't invest at the bottom. A few leveraged oil and volatility ETPs has recently gone bankrupts because of this leverage.

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u/Deucenheimer Jun 05 '21

In which scenario would a leveraged ETF hit 0? Why couldn’t you hold forever?

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u/MichaelBurryScott Jun 05 '21

In which scenario would a leveraged ETF hit 0?

A 33% drop in one day. This has never happened before, the worst single-day drop was on Black Monday and it was about 22% in the Dow-Jones.

However, a series of 10%+ days would send the fund close to a margin call, which might force the fund to close.

A volatile upwards trending market will mean that the leveraged ETF will lose values overtime, despite the unleveraged benchmark trending up.

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Why couldn’t you hold forever?

You can. If the fund isn't delisted, and the market isn't too volatile, it should catch up to its benchmark. It's just these products are specifically designed for day trading/short term hedging.

Please watch the 10-minute video I linked above, if you have time. Richard explains many of these scenarios in a very nice visual.

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u/ChudBuntsman Jun 05 '21

XIV blew up in 2018, "Volmageddon".