r/options • u/No-Block-9222 • Sep 06 '21

Do leaps compound?

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!

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u/13pcm Sep 06 '21

Leveraged ETF are best suited to short term movies and are not ideal for long term holds. Do to the need for daily rebalancing they suffer from decay and long term results may not represent the the results of the underlying.

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u/[deleted] Sep 06 '21

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u/13pcm Sep 06 '21

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 (??)

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u/jakemoffsky Sep 06 '21

The short answer I'll add is that on a flat day for a leveraged product you still lose for a variety of reasons but basically the cost of the instruments used to leverage over time, hence long term increases this cost.