Let's talk about leveraged etfs and their options

We all know that TQQQ is a triple long etf of QQQ, so buying a share of TQQQ is equivalent to buying how many shares of QQQ? In other words, if you buy x shares of TQQQ, and y shares of QQQ, what should be the ratio of x to y to achieve the same profit/loss?

If your answer is 3, then you have made a mistake. Understanding the leverage ratio is crucial for leveraged etfs.

The current price of qqq is 426, and tqqq is 56; the ratio of their change rates is three times, which means qqq rises by 1%, and tqqq rises by 3%. The actual stock price changes are qqq rises by 4.26, and tqqq rises by 1.68. Calculating that 4.26/1.68 = 2.5, which means you need to buy 2.5 shares of tqqq to match the increase of 1 share of qqq.

What is the capital utilization rate?

From the above question, under the condition of the same profit, the ratio of the number of shares between qqq and tqqq is 1:2.5, and the amount of capital required is 426:140 = 3. So everyone should realize that a triple leverage is based on capital, not the number of shares. The result is very intuitive here, and next we will discuss the issue of options.

The current ATM call price of the monthly options is qqq:tqqq = 9.2:3.4 = 2.7. The result we obtained in question 1 is 2.5, which is very close. The leverage ratio of the number of shares also applies to options.

1. Liquidity. Some underlying assets and their leveraged etfs have different liquidity. Choose those with better liquidity to reduce spreads and the difficulty of closing positions after drastic changes.

2. Capital size. If you want to cash secured sell put tsla, you need at least 18k in cash, while the starting price of tsll is only 1k, with much more room for adjustment. Conversely, if your capital size is large enough, then owning the underlying stock is better because the transaction fees for options trading will be less, and there is no need for additional adjustment space caused by low share price of leveraged etfs.

3. Investment period. Leveraged ETFs are usually not suitable for long-term holding, only suitable for short-term hedging or one cycle (1 day to 1 month). The holding and management fees incurred over a long period of time can bring unexpected losses. The option pricing of leveraged ETFs takes into account wear and tear, but it cannot accurately predict the future wear and tear rate (continuous displacement will accelerate wear and tear, while wear and tear is minimal when only moving in one direction).