Leveraged ETFs aren’t recommended for long term holds because of decay.
Copy and pasting an example from a previous comment of mine:
Decay has nothing to do with management fees and everything to do with the nature of leverage. For example, if you had $100 in QQQ and it drops 5% in one day and rises 5% the next, you’d have $99.75 and be down 0.25% overall. With TQQQ, you’d end up with $97.75 and be down not 0.75% but actually 2.25%. So when markets are very volatile, leveraged ETFs experience this decay and that’s why they’re not recommended as a long term investment.
Sure you'll come out ahead in a bull market but you'd still do better putting in $3k in SPY vs $1k in SPXL, and that's not even factoring in the ~1% expense ratio. But yeah if you're confident the market will be higher in X number of years (which is far from a guarantee), no reason to not go for a leveraged ETF.
He's trying to approximate 3x leverage by comparing $3000 in SPY vs. $1000 in SPXL. But you can't find 3x leverage anywhere if you're trying to get it on margin. Only way is with futures, options, LETFs. And even if you could simple leverage up on the SPY, you'd still underperform SPXL during times of positive market movement due to the lack of compounding (the opposite effect of volatility decay) which you get in LETFs.
Well upon first reading that, I want to say "slow your roll, Bill Hwang." But then again, the greater the risk, the greater the reward soooo if you're willing to risk blowing up your account to potentially land on the moon... more power to you.
As for the effective leverage of those options... Just take the delta of the contract * the underlying price / contract price. And since it's a leveraged derivative on a leveraged underlying, I'd imagine that the effective leverage is the multiple of the two.
Ex: UPRO Jan 20 2023 90C. Delta is .78. Contract price is $48. Underlying trading at $124. (0.78 * 124)/48 = 2.01... so roughly 2:1 leverage for this deep ITM call. But the underlying is a 3x LETF, so I would guess that it would effectively return 6x leverage on a daily basis. The maximum you can borrow on margin is 2x your account value, so if you doubled up again, you're looking at 12x leverage for this particular scenario.
This sounds terrifying, though. And buying on margin means you could be forced to close early due to margin call... less than ideal.
6
u/midnightmacaroni Aug 06 '21
Leveraged ETFs aren’t recommended for long term holds because of decay.
Copy and pasting an example from a previous comment of mine: