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Strategies (leveraged) that crush the S&P 500

43,974 Views | 135 Replies | Last: 1 yr ago by RangerRick9211
deadbq03
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7:47p, 3/24/20
AG
No question. That's why I bailed out once TMF fell victim to the volatility. But really that's just a question of your mental state. If you're someone who can ride out corrections in normal index funds, there's really not much difference in riding them out in a leveraged... especially if you hedge with TMF. Over the long run, it works, even if there's pain in the short term.

I'm too gun shy to stick it out. And even if you did something very simple like waiting on 200 SMA crosses to buy or sell these leveraged ETFs you'd do still do better than the market and miss out on a lot of pain.
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FaceMask
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7:58p, 3/24/20
In with SDS at $35.60 towards day close.
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The Lurker
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4:47p, 6/8/20
AG
Any updates on how the "crushing" is going with this strategy?
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$30,000 Millionaire
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5:09p, 6/8/20
AG
I'd be pretty damn leery if I was a UPRO/SPXL holder right now. Maybe it goes to ATH from here, but feels overbought.
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deadbq03
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In reply to The Lurker • 6:00p, 6/8/20
AG
The Lurker said:
Any updates on how the "crushing" is going with this strategy?
I'm back in a little bit, but taking a different approach. Experimenting with a covered call strategy using TQQQ (more liquid than the others in the options market).
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Bob Knights Paper Hands
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12:44p, 6/13/20
Following up on a question I posed in the Stock thread, with the volatility expected higher next week due to quid witching week and the very low put to call ratio we have, is this a good time to get in to SDS or one of the leveraged inverse funds for a week? My thought process is with more options expiring and potentially getting squeezed and the greater amount of calls being out there, do we more likely see downward movements in index prices than upward movement? If so maybe we can profit off that by getting in on leveraged inverse funds.

Or is there a flaw in my thinking here? I'm still relatively knew at more active trading.
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$30,000 Millionaire
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In reply to Bob Knights Paper Hands • 1:07p, 6/13/20
AG
Bob Knights Liver said:
Following up on a question I posed in the Stock thread, with the volatility expected higher next week due to quid witching week and the very low put to call ratio we have, is this a good time to get in to SDS or one of the leveraged inverse funds for a week? My thought process is with more options expiring and potentially getting squeezed and the greater amount of calls being out there, do we more likely see downward movements in index prices than upward movement? If so maybe we can profit off that by getting in on leveraged inverse funds.

Or is there a flaw in my thinking here? I'm still relatively knew at more active trading.


Are you able to buy puts? I am sure you can make some profit off of this. I just advise (from experience) to be really careful with loss and gain management. I would probably close the position out often or have good stop losses. A 1% overnight gap up can hurt a lot. If you believe we are going down - do it.
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Bob Knights Paper Hands
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In reply to $30,000 Millionaire • 4:21p, 6/13/20
$30,000 Millionaire said:
Bob Knights Liver said:
Following up on a question I posed in the Stock thread, with the volatility expected higher next week due to quid witching week and the very low put to call ratio we have, is this a good time to get in to SDS or one of the leveraged inverse funds for a week? My thought process is with more options expiring and potentially getting squeezed and the greater amount of calls being out there, do we more likely see downward movements in index prices than upward movement? If so maybe we can profit off that by getting in on leveraged inverse funds.

Or is there a flaw in my thinking here? I'm still relatively knew at more active trading.


Are you able to buy puts? I am sure you can make some profit off of this. I just advise (from experience) to be really careful with loss and gain management. I would probably close the position out often or have good stop losses. A 1% overnight gap up can hurt a lot. If you believe we are going down - do it.

I was thinking about setting stop limit corresponding with and SPY of 310 (and make that limit price another 4% below the stop). Then I was going to set sells corresponding to 297 SPY, 286 SPY, and 270 SPY. Basically hope get stopped out one way or another with the first 2/3 and either sell that last 1/3 or let it go till it gets stopped as well.

I like the idea of not having a set date and watching theta eat me alive if it doesn't go down quite as quickly. I'll post the outcome here.
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Brian Earl Spilner
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5:31p, 6/13/20
AG
What's the benefit of trading options rather than shares?
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dantes
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5:32p, 6/13/20
AG
Why not sell puts or put spreads vs hold the ETFs?
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$30,000 Millionaire
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In reply to Bob Knights Paper Hands • 9:43p, 6/13/20
AG
Bob Knights Liver said:
$30,000 Millionaire said:
Bob Knights Liver said:
Following up on a question I posed in the Stock thread, with the volatility expected higher next week due to quid witching week and the very low put to call ratio we have, is this a good time to get in to SDS or one of the leveraged inverse funds for a week? My thought process is with more options expiring and potentially getting squeezed and the greater amount of calls being out there, do we more likely see downward movements in index prices than upward movement? If so maybe we can profit off that by getting in on leveraged inverse funds.

Or is there a flaw in my thinking here? I'm still relatively knew at more active trading.


Are you able to buy puts? I am sure you can make some profit off of this. I just advise (from experience) to be really careful with loss and gain management. I would probably close the position out often or have good stop losses. A 1% overnight gap up can hurt a lot. If you believe we are going down - do it.

I was thinking about setting stop limit corresponding with and SPY of 310 (and make that limit price another 4% below the stop). Then I was going to set sells corresponding to 297 SPY, 286 SPY, and 270 SPY. Basically hope get stopped out one way or another with the first 2/3 and either sell that last 1/3 or let it go till it gets stopped as well.

I like the idea of not having a set date and watching theta eat me alive if it doesn't go down quite as quickly. I'll post the outcome here.


I like the strategy. If you're gaining, it's good. Just don't get greedy. I would move up the stop as the position gets into profit.
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Bob Knights Paper Hands
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In reply to dantes • 9:47a, 6/14/20
My thought was buying the inverse ETF instead of buying puts because of the large premium to buy a long way out and to avoid the theta squeeze of buying for this week. Of course the decay will factor in some of that higher theta. I see it as a way to invest in downside with a bit less % risk (and reward) during an otherwise higher volatile week. Not sure if that's correct thinking or not.
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Bob Knights Paper Hands
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4:41p, 6/15/20
I ended up manually selling my SDS before it hit my loss limit. I had barely missed my limit to sell half when it was close to my profit point at the open. I should have manually sold since I was targeting an approximate 297 SPY for that first profit point, but I underestimated decay to the price of SDS.

So I lost a few grand on this one, but I did hedge with $310 weekly calls at the open that I sold after the Fed announcement today so I almost made up for that.

I still think it's an interesting alternative to buying puts when there's reason to think the market may more likely be bullish but uncertain about the magnitude of movement. I violated rule #2 "don't fight the Fed." Without that announcement I think this might have turned out better.
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$30,000 Millionaire
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4:56p, 6/15/20
AG
the fed bounce was a really small bounce, if you think about it. I wonder how sensitive the market will be to on-going fed moves. Feels like the only two levers left are 1) buy stocks, and 2) negative rates.

If either one of those is true, I'm just loading up on UPRO and riding it up every day.
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ebdb_bnb
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10:36a, 6/22/20
https://www.reuters.com/article/us-credit-suisse-gp-etp-delisting/credit-suisse-says-it-will-delist-volatility-etn-idUSKBN23T2BI

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TriumphForks
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3:51p, 7/10/20
AG
TQQQ closed less than a dollar off its ATH today. Any of y'all hold this thing through the COVID dip?
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SMM48
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In reply to Brian Earl Spilner • 4:31p, 7/10/20
AG
you know exactly how much you stand to lose.
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Tumble Weed
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In reply to TriumphForks • 9:25a, 7/13/20
TriumphForks said:
TQQQ closed less than a dollar off its ATH today. Any of y'all hold this thing through the COVID dip?
Cashed out at a 15.52% loss. Expensive lesson learned.

It outperformed some individual stocks that I held through the dip. I never could get comfortable with the leveraged funds.
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Brian Earl Spilner
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In reply to SMM48 • 11:59a, 7/13/20
AG
Anyone mind simplifying the way options work? I've honestly googled it multiple times but just can't seem to get how it works or why it's preferable to trading stock.

(ie. how these differ from stop limit orders)
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Red Rover
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In reply to Brian Earl Spilner • 7:27a, 7/14/20
AG
Someone is selling or acquiring the right (or the option) to purchase shares of stock on a particular day at a particular strike price. You pay or are paid a "premium" for this right. Options are sold in contracts, which represent groups of 100 shares.

Basically think about it like this - with buying a share of your stock you gain or lose money of exactly the delta from that stock price increase or decrease. At the end of whatever time period you can sell that stock and if you've gained or lost $10 on a $100 stock you had a 10% change. With options you pay less to control more shares of that same stock. So maybe you bought one contract of a call with a $1 premium per share (x100 shares) so you also spent $100. If you bought it with a strike price at the current price of $100 (ATM, Ignore that for now) and the stock goes up $10, you can execute the call option and buy 100 shares of the $110 stock for $100 or you could sell the contract for $10/share. So you invested $100 and that is now worth $1,000. However if your stock stays at $100 or goes down, your call options expire worthless and you lost all of you $100.

You can also buy puts if you think the stock price will go down, or sell calls or puts. Or combinations of those.
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deadbq03
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In reply to Red Rover • 8:28a, 7/14/20
AG
(Meant as a reply to Brian)

The distinction you need to recognize is that the options contract itself is tradeable. It doesn't just sit there waiting for the month to run out and prove you wrong or right. This is the concept that most online explanations fail to discuss well... they discuss the mechanics of what the option will do at expiration, but not what happens in the meantime. Buying a call option shouldn't be thought of in terms of wanting the stock to reach a particular price at a particular date... it should be thought of in terms of wanting to see movement early in the contract and taking a profit on that early movement.

Using the above example, if Bob buys 1 share of XYZ stock for $100. Jim buys a $1 call option for the same stock for next month at a strike price of $105... and spends the same $100 to do this. From a standpoint of option mechanics, that means that Jim needs the stock to rise above $106 in order to make a profit at expiration. He's paying $1 per share now for the option to buy 100 shares at $105 dollars a share next month. When you think of this strictly in terms of those mechanics, yes - it kinda seems like a limit order.

But in terms of trading the option itself things are very different. Jim doesn't need to wait for the option to reach $106... he can make a very large profit the very next day (or same day).

If the very next day, XYZ had a good news release and the stock price jumped to $110, Bob would've made $10 on his stock. But Jim would see massive gains. The premium on that same option might be $8 at this point, so Jim could sell the contract back for a $700 profit.

But even if the gains were more modest... a $1 jump in the price of XYZ the next day would result in probably a 0.75 or so jump in the option price... so again, Bob would make $1 profit in a day, but Jim would make $75.
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Brian Earl Spilner
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10:31a, 7/14/20
AG
Those are both really helpful, thanks for the response.
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deadbq03
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2:23p, 7/16/20
AG
Back on topic, I obviously haven't traded it for awhile, but I just discovered that UGLD (3x GLD) got delisted a couple weeks ago.

Not happy with that. It did quite well for me as a defensive position and there's no 3x alternative. UGL is a 2x that'll probably get more volume now, but I'm gonna miss UGLD when I want to come back to gold.
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bmks270
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In reply to Brian Earl Spilner • 5:32p, 7/17/20
AG
Most options traders don't plan to hold options to expiration. They wait for price moves and then sell the contract for a profit or loss. Options lose a little value each day, so traders usually don't like to hold them too long, or to expiration. The farther away the expiration date, the more expensive the option contract.
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RangerRick9211
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In reply to The Lurker • 4:18p, 8/25/21
AG
The Lurker said:
Any updates on how the "crushing" is going with this strategy?
I started the HFEA in September '19 and made an update on BHs today. Thought I'd share that update here.

  • 55/25/20, UPRO/TQQQ/UBT mix. I plan on rebalancing soon. I have not rebalanced to-date.
  • Total return to-date: 174%
  • CAGR: 52%

I'm also at 40.59% CAGR on PSLDX. The entirety of one of our ROTH accounts are in PSLDX now.

PSLDX and HFEA represent 10% of our portfolio now.
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RangerRick9211
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In reply to jamaggie06 • 6:46p, 8/25/21
AG
jamaggie06 said:
And yes thats generally true. The S&P doesnt normally have large daily swings. But lets examine the effects of a market like today.

Generic unleveraged fund
Closes at $100 yesterday
Closes at $90 today. 10% drop
2 days later, back to $100
Using equally weighted gains for the two days
$90 x (1 + 0.054)^2 = $100

Generic 2X leveraged fund Y
Closes at $100 yesterday
Closes at $80 today. 20% drop
Using equally weighted 2x gains for the two days
$80 x (1 + 2 x 0.054)^2 = $98.25

Down 1.75% over the three day window the regular fund is even.

The decay is a function of the volatility. These funds get eaten up during volatile periods.

So, yes, it works great in stable markets, the decay is minimal. But exactly when you are hurting most, during periods of high volatility, it takes it in the shorts even harder.

Just something to keep in mind.


Note, it's even worse if it takes just one day for the unleveraged fund to return to $100. The leveraged fund would be at $97.78, or 2.22% decay in one day.

And the effect is worse (or rather, is more prominent on even smaller bouts of volatility) for 3x funds.
Sorry, two years later but I'm just reading through the decay comments.

It's true that volatility decay exists. It exists for levered and unlevered. It's just a mathematical fact of arithmetic averages. It's not unique to levered ETFs, though.

The following sequence +10%, -10%, +10% yields an average of 3.3%. If you actually experience that cycle you'd expect: 1 x (1+.033)^3 = $1.102.

Reality:
  • $1 (1 + 10%) = $1.1
  • $1.1 (1 - 10%) = $0.99
  • $0.99 (1 + 10%) = $1.089

You lost a penny relative to the arithmetic mean expectation (again, at 1x leverage which we all have and experience some vol drag). It's why CAGR is so popular as it's a geometric mean.

Geo mean: ((1 + 10%) * (1 - 10%) * (1 + 10%))^(1/3) - 1 = 2.88% which is the real return.


Volatility drag does compound with leverage. So do the benchmark returns which everyone wants to ignore when discussing levered decay. So far my compounded levered returns on benchmark have outweighed the levered volatility drag (HFEA stress tested in March '20 and '08 & '20 for PSLDX).
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The Lurker
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9:28a, 7/27/22
AG
T&P for anyone who did this strategy. Probably need a 600% return to get back to even.
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Cyp0111
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In reply to The Lurker • 11:17a, 7/27/22
Its all fun and games.
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RangerRick9211
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In reply to The Lurker • 1:50p, 7/27/22
AG
The Lurker said:
T&P for anyone who did this strategy. Probably need a 600% return to get back to even.
Let's find out.

My update from above the last time you asked.

Quote:
I started the HFEA in September '19 and made an update on BHs today. Thought I'd share that update here.

  • 55/25/20, UPRO/TQQQ/UBT mix. I plan on rebalancing soon. I have not rebalanced to-date.
  • Total return to-date: 174%
  • CAGR: 52%
Started 9/19 - $10,000
Today - $13,469

Total return to-date: 34.69%
CAGR: 11.03%

Peak: $30,348
Max draw: -55.62%

Edit: Oh, yeah, based on yesterday's close. Doesn't include the rip just now on the fed. That will help!
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Medaggie
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12:31p, 7/28/22
Decay will kill the returns and in time will bring the leveraged funds towards zero.

Its more complicated with rebalancing so you can't lose more than 100%. So if S&P dropped 50% in a dy, a 3x leveraged fund can not lose 150%. Here is a good explanation.

Suppose that over 50 trading days, half of those days your index goes down by 5%, and half of those days it goes up by 5%. If you were investing in an unleveraged fund, at the end of that period of modest volatility you would still have 93.9% of your money.

Now suppose you're in a 3x leveraged ETF. On down days, your ETF goes down by 15%. On up days, it goes up by 15%. One up-down cycle, and you've lost 2.25% of your money. (1.15*0.85=0.9775.) Two up-down cycles, and you've lost 4.45%. After the 50 days I mentioned, only 56.6% of your money remains.
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RangerRick9211
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In reply to Medaggie • 2:01p, 7/28/22
AG
Medaggie said:
Decay will kill the returns and in time will bring the leveraged funds towards zero.

Its more complicated with rebalancing so you can't lose more than 100%. So if S&P dropped 50% in a dy, a 3x leveraged fund can not lose 150%. Here is a good explanation.

Suppose that over 50 trading days, half of those days your index goes down by 5%, and half of those days it goes up by 5%. If you were investing in an unleveraged fund, at the end of that period of modest volatility you would still have 93.9% of your money.

Now suppose you're in a 3x leveraged ETF. On down days, your ETF goes down by 15%. On up days, it goes up by 15%. One up-down cycle, and you've lost 2.25% of your money. (1.15*0.85=0.9775.) Two up-down cycles, and you've lost 4.45%. After the 50 days I mentioned, only 56.6% of your money remains.
I do like that your definition of "modest volatility" being 50 consecutive days of 5% swings.

Decay exists for both underlying and levered. It's just math.

Quote:
Decay will kill the returns and in time will bring the leveraged funds towards zero.
As an axiom, not true. As long as levered returns > volatility implied decay a leveraged 3x ETF will grow.

There are countless permutations of scenarios that will sink a 3x fund. How likely is your "modest" scenario above to actually happen? It's not. What about consecutive days of circuit breakers? We experienced that in March of '20 and UPRO went from $40 to $10. We almost experienced a complete collapse, but alas it survived. So there is a chance, but it's just that - not a given.
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