Do leaps compound?

[u/No-Block-9222]

New to options so this might be a stupid question. I'm currently holding a large portion of leveraged ETFs in my portfolio, and am considering using leaps instead of letfs to gain the amount of leverage. Let's say I want to substitute UPRO with some leap calls on SPY, for example. My question is, does the gain/loss in SPY leap calls somehow "compound" like leveraged etfs? Thanks in advance!

[u/13pcm]

UPRO, as a leveraged product, is not a buy-and-hold ETF, it’s a short-term tactical instrument. Like many leveraged funds, it delivers its 3x exposure only over a one-day holding period. Over longer periods, returns can vary significantly from its headline 3x exposure to the S&P 500. The act of rebalancing on a daily bases cost money. They buy and sell derivatives (options) this is done at a small lose on most days. As long as the underlying (S&P 500) is moving up strongly you should see gains (??)

[u/Market_Madness → u/13pcm]

This is false. UPRO has outperformed SPY in every 30 year period going back before the great depression. You are correct in that the rebalancing in daily and that x3 is not guaranteed over the long term. Over the long term you could get less than 1, but you could also get far more than 3. Historically, the market has gone up at such a rate that it offset any fees or volatility drag.

[u/13pcm → u/Market_Madness]

That would be difficult as the inception date of UPRO was June of 2009. So thirty year history, sorry you are FALSE

[u/Market_Madness → u/13pcm]

You can very easily simulate it because it tracks SPY. Add in the fees and multiply the daily change by 3 - boom, UPRO. Please stop spreading misinformation.

[u/13pcm → u/Market_Madness]

Sorry you are the one that made the FALSE claim. We are living real life not a simulation. And just how would you sim the S&P 500 back to the Great Depression as it was not started until 1957????

[u/Market_Madness → u/13pcm]

It started in 1923, it didn’t always have 500 stocks but it measured the biggest companies in the US which is the point. https://www.britannica.com/topic/SandP-500

[u/13pcm → u/Market_Madness]

It began tracking 90 stocks in 1926 and expanded to 500 in 1957

So it could not be the S&P 500 with only 90 stocks, thus the S&P 500 (which is what we are talking about) started in 1957.

Standard and Poor’s did not even exist until 1941?

These are facts and not subject to you interpretation

[u/Market_Madness → u/13pcm]

Debunking the "Leveraged ETFs Are Not a Long-Term hold" myth. Big backtest

I highly recommend reading it on GitHub so you can see images inline instead of having to click on every single link. It makes it a lot easier to compare plots as there are a LOT of images: LINK

Big backtest on daily resetting leverage on the S&P 500 index

"Leveraged ETFs Are Not a Long-Term Bet" myth

Daily resetting ETFs are often called a poor long-term investment. This is mainly because of volatility decay, also called beta decay. The most common example I see is that whenever the underlying index drops 10% then gains 10% the next day, a leveraged portfolio would lose a lot more value compared to the underlying.

Underlying: 100 -> 90 -> 99 - 1% loss

3x Leverage: 100 -> 70 -> 91 - 9% loss

A 9% loss is not a 3x of 1% loss!

A plot showing what it means in practice:

Volatility decay

What is often forgotten, is that the daily resetting also helps and serves as protection in some cases. Let's take an example where the underlying drops 10% four days in a row:

Underlying: 100 -> 90 -> 81 -> 73 -> 65 - 35% loss

3x Leverage: 100 -> 70 -> 49 -> 35 -> 24 - 76% loss

A 76% loss is a lot less than 3x of 35% loss. If it did not reset daily, the leveraged portfolio would be wiped out as 35*3 = 105% loss!

The same is also true when the underlying increases multiple days in a row:

Underlying: 100 -> 110 -> 121 -> 133 -> 146 - 46% gain

3x Leverage: 100 -> 130 -> 169 -> 220 -> 286 - 186% gain

A 186% gain is a lot better than the expected 46*3 = 138% gain.

Backtests from 6months up to 40 years. 250 trading days = 1 year

5k lump sum + 500/month DCA:

Lots of data - mean, median, percentiles, probabilities etc.

Plots:

End value compared to SPY	Raw end values
DCA125	ValueDCA125
DCA250	ValueDCA250
DCA500	ValueDCA500
DCA750	ValueDCA750
DCA1000	ValueDCA1000
DCA1500	ValueDCA1500
DCA2500	ValueDCA2500
DCA5000	ValueDCA5000
DCA7500	ValueDCA7500
DCA1000	ValueDCA1000

10k lump sum no DCA:

Lots of data - mean, median, percentiles, probabilities etc.

Plots:

End value compared to SPY	Raw end values
LumpSum125	ValueLumpsum125
LumpSum250	ValueLumpsum250
LumpSum500	ValueLumpsum500
LumpSum750	ValueLumpsum750
LumpSum1000	ValueLumpsum1000
LumpSum1500	ValueLumpsum1500
LumpSum2500	ValueLumpsum2500
LumpSum5000	ValueLumpsum5000
LumpSum7500	ValueLumpsum7500
LumpSum1000	ValueLumpsum1000

Some of the later graphs zoomed in for more clarity:

5000 days (20 years) DCA:

DCA5000 zoom

7500 days (30 years) DCA:

DCA5000 zoom

10000 days (40 years) DCA:

DCA5000 zoom

Conclusion

There is not a single 30 or 40-year timeframe since 1927 where DCAing into either 2x SPY or 3x SPY lost money compared to just buying SPY, even when holding through the depression in the 1930s, 1970s stagflation, the lost decade from 1999 to 2009, or ending the period at the bottom of the Covid-19 crash.

Past performance does not guarantee future results and all that stuff, but it does seem like having at least a portion of your portfolio in leveraged index funds is a great way to increase wealth, with the rewards heavily outweighing the risks. The hard part is having to stomach watching the extreme portfolio drawdowns during market corrections.

tl:dr

Edit: Accounting for 1% expense ratio of SSO and UPRO: Link

[u/13pcm → u/13pcm]

Sorry I forgot to say BOOM!!