TQQQ -- Shorting Puts (Options)

Understandably, everyone on WSO has a hard-on for TQQQ. I've been experimenting with my own TQQQ strategy in my PA. Instead of going long on shares of the ETF, I'm shorting TQQQ puts (writing cash-secured puts which is a bullish strategy on the underlying TQQQ). What does this mean?

Every month, I write ~35 delta puts on TQQQ to capture 6-7% return on my capital in the form of premium on cash secured put options that expire in 30-45 days. Annualized compounded returns would be in the ~70% ballpark assuming a 75% success rate. Even with some return slippage, the strategy should allow you to exceed 50% yearly in a flat market or moderately bullish market and much higher in a very bullish market.

Reasons why IMO this is a much better alternative than just buying the underlying ETF:

  • Volatility is about 50% - 65% less than simply holding TQQQ, both on the upside and downside. So for huge down days when TQQQ is 6%-10% down, you only get ~50% of that volatility if you're short puts. Also based on your strike price and breakeven cost, you're not necessarily even losing money on big drawdowns until your breakeven price is tested
  • This strategy will outperform holding TQQQ shares in a flat market or a slightly down market (2018 when S&P was down 6% and TQQQ was down 19%). It will underperform TQQQ absolute returns in a very bullish market. My near-term market outlook is pretty neutral, but even if the market keeps returning 20% annually the next few years, I'm willing to forego some of the share upside for reduced volatility on the downside by shorting puts 
  • Ability to manage positions. For me, this is the biggest difference maker vs. just holding ETF shares. And I think it's an absolutely huge game changer. Because TQQQ is so volatile, if the market goes south, I can roll my short puts farther out in time (i.e. out another month, or longer) for a credit and reduce my breakeven cost-basis which increases my probability of success on each trade and increases long-term profitability
    • Example: TQQQ is at $170. Today I write $160 strike puts that expire in January and collect $10 in premium (6.25% ROI). In mid-December TQQQ proceeds to go down 10% to $153. The holder of shares is down 10% on paper but I'm actually still profitable on the trade because my breakeven cost is $150 ($160 strike - $10 premium collected). If my breakeven is tested (TQQQ goes below $150), I can roll out into the next month for a small credit, thus further lowering my cost basis and increasing the probability of success. In theory if markets are cyclical and always bounce back after corrections/bear markets, you can roll in perpetuity until the ETF bounces back. You will be taking a loss on each roll but you can also lower your cost basis on every roll, allowing you to in theory effectively catch the bottom of the market
  • IMO rolling out in time for a credit if the trade goes against you is the ultimate cheat code for a volatile ETF like TQQQ. Why? It allows you to effectively keep averaging down without having to tap your account for more cash. If the trade goes against you. Yes, every time you roll out you're closing the original trade for a loss, but if you collect a credit on the roll out, you are averaging down on your share cost basis  
  • Managing your short put not only allows you to protect your downside, but also increases your IRR on the upside. If you're able to book 50% profits in the first 10 days of your 40 day trade, you can book your profits on day 10 for example and open a new position by rolling out to the next month
  • No post would be complete without downside considerations. The  only downside to this strategy is that we enter a long secular bear market that is 5+ years long. You'll still be able to reduce your cost basis every time you roll out but you will be taking losses for a long time. It takes a lot of discipline/mental fortitude to stay with the strategy long-term while markets keep going against you, similar to how it takes mental fortitude to not sell shares at the bottom of a long bear market. The upside here is you'll eventually breakeven (no market goes down forever) and you will own TQQQ at an unbelievable cost basis when you get assigned shares--if you ultimately take assignment--which you can just hold for the ride back up. The other upside is that you will do much, much better than someone who simply bought and held an triple leveraged ETF through a correction or bear market

Comments (71)

  • Research Analyst in HF - Other
Nov 29, 2021 - 7:55pm

TQQQ guy here - I haven't really thought about this in depth but a couple things to consider.

1) have you backtested this over a period of time to see how it would have performed vs. simply holding the ETF?

2) given you are cash securing the put, this limits/negates any leverage that would be gained of using options, but there won't be any margin calls of course. How would the short puts have favored in the 75% correction in 2020? And the roll strategy capturing the upside in the resulting months. I don't quite agree with your "being bought into TQQQ at the absolute lows" if you get assigned on your puts because you've bought in at a fixed price if that happens. I'm very concerned about this strategy being able to capture the upside/rebound from these drawdowns if they happen quickly. TQQQ routinely draws down 20-30% and rallies 50% in the 1.5 months afterward. (Take the last 5 months as an example)

Does your strategy involve covering and rolling puts into higher strikes before the expiry of TQQQ shoots upward before month end?

& How often do you think assignment occurs when shorting options? In my experience it was definitely a real risk when I used to do iron condors and shit like that where your short legs would be assigned like 30% of the time.

3) does this still make sense all in given you're paying ~50% short term cap gains taxes vs. deferred LT cap gains and the added ability to take margin loans against the asset base to avoid selling stock. I'm not sure IRA's allow cash secured put writing, theoretically they should given it doesn't rely on margin, but may be an interesting.

4) why does volatility or lack thereof matter to you for long term retirement assets - are you worried about having a cash need at an inopportune time? Volatility drag on returns of course is real but when the mean daily return is very positive you don't really get those negative effects vs. ETFs that generally move sideways and have mean daily returns around zero.I'll look more into this - 6.75% monthly compounding returns doesn't sound bad at all - just would be interesting to backtest to see annual returns in years like 2018 and 2020 or even 2021. Think in years where TQQQ returns 100% you're obviously losing but the down years will be interesting. Obviously very path dependent.

Nov 29, 2021 - 8:30pm

Thanks, I still need to back test this through the financial crisis drawdown and the COVID crash. I know for sure the max drawdown peak to trough would be much smaller shorting puts than it would be holding the underlying. Why do I care about volatility? Bc I am very bullish on the NDX and the leverage is what generates real alpha, but with TQQQ the probability of a catastrophic 90%+ drawdown isn't a matter of if but when. When SPX has its next 30%+ bear market, TQQQ will be destroyed. If I short puts, my exposure on the downside will be around ~~50% of the volatility exposure of the underlying which works out to a slightly higher downside exposure compared to holding an index fund. For example, if SPX/NDX decline 25%, TQQQ will decline ~75%, but shorting TQQQ puts should drawdown like 30-35%. Again this all rough estimates. And you have added flexibility of managing your positions, reducing cost basis, etc.

1) have you backtested this over a period of time to see how it would have performed vs. simply holding the ETF?

Would like to backtest but haven't done so with options before. I'll google around a bit tomorrow. Any resource you can suggest? Idc if it's a paid service.

I don't quite agree with your "being bought into TQQQ at the absolute lows" if you get assigned on your puts because you've bought in at a fixed price if that happens.

You probably won't capture the absolute bottom. But you should be much, much closer to the bottom than the top and it would definitely beat out buy-and-hold if you keep rolling for credits which lowers your breakeven cost basis (see opening post example) and let yourself get assigned after a technical indicator has indicated a reversal, like for example SPX reclaiming the 100 or 200 day SMA.

Does your strategy involve covering and rolling puts into higher strikes before the expiry of TQQQ shoots upward before month end?

No, the strategy is just continued rolling out in time until eventually TQQQ bounces and the short put expires worthless and you get to collect your full rolled premium free-and-clear. Or you keep rolling while taking credits on every roll so your cost basis is eventually so low that you are happy to take assignment. You can still roll for a credit while reducing your strike price if you add more extrinsic value to the option (i.e. go farther out in time). Ideally, you would want to avoid assignment.

Also a bit of a tangential point but remember when rolling puts down/lowering your strike price, you are freeing up capital. I.E. 250 contracts at a $162 strike requires $4,050,000 in cash collateral, but if you keep rolling the 250 contracts down, to eventually for example an $80 strike, that only requires $2,000,000 in collateral.

How often do you think assignment occurs when shorting options? In my experience it was definitely a real risk when I used to do iron condors and shit like that where your short legs would be assigned like 30% of the time.

Not sure. Early assignment is a risk for sure. Ideally I wouldn't want the short put option to go too deep ITM so when I roll, I would adjust the strike price down while adding more extrinsic value to generate a credit.

Why does volatility or lack thereof matter to you for long term retirement assets - are you worried about having a cash need at an inopportune time? Volatility drag on returns of course is real but when the mean daily return is very positive you don't really get those negative effects vs. ETFs that generally move sideways and have mean daily returns around zero.

Volatility answered in my first paragraph above. But yes, volatility drag is one small component of why I'm not super keen on holding the underlying but by far the biggest reason is the eventual and inevitable 90%+ drawdown that will take a decade+ to recover from (i.e. dot com bubble 2.0).

Nov 30, 2021 - 11:11am

Have you considered hedging with VXX calls? I did some brief research on the correlation and expected moves based on different SPX drawdowns and found that if you allocated about 6% of your portfolio to 1 year DTE calls at 100% OTM, you would basically be perfectly hedged against any drawdown. Now obviously no one would do this normally because 6% is usually a huge drag on returns, but if your expected return is 70% I see no reason to give up a measly 5-6% in the name of massively reduced downside exposure.

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  • Research Analyst in HF - Other
Dec 2, 2021 - 7:04pm

Long post but I'll try to respond chronologically to your response. Big first - please please BACKTEST THIS before you spend 4 years putting your entire PA into this. From the comments it looks like you've jumped in already.

 The quick and dirty backtest. If you have a Bloomberg terminal you can get historical pricing for expired options and so can create an algorithmic scenario of how your strategy would perform. I think during any high vol logically just would fucking terrible. High level my thought going into this was you're capturing 80% of the downside and 20% of the upside, and I was pretty much right. This strategy sucks donkey dick in vol environments and, given TQQQ = Vol, pretty much every environment cuz TQQQ ain't gonna just trade sideways month to month on end.

 Lets take the first 6/7 strikes covering the first 6 months of 2020 up through at least 6/30/2020:

  1. Long TQQQ - this is easy obviously. Performance from 01/02/2020 to 06/30/2020 - 7.50%
  2. Writing 35 Delta Monthly Puts on TQQQ - Keep in mind TQQQ went through a stock split in 2021 so all the strikes will "look" doubled compared to the TQQQ price that your charts will show.
    1. January 1st - We have 2 options, the 1/17 expiry or the 2/21 expiry. Lets do the 1/17 expiry as its closer to 30 days. The 88 strike put had a ~35 delta at the time. You sell it at 1.84 on Jan 2nd. For every share underlyer you sell you need to hold $80 against that. So you're getting a 2.30% return in 16 days. On Jan 17th, TQQQ is 99.9! You make 2.30% for the period. In the same period TQQQ is up 9.97%
    2. January 17th - You're rolling these sweet gains into the 2/21 expiry now. TQQQ is now 99.9, and the 35 delta put is at strike 95 (in reality delta is around 32=33 but I don't have all day here). You sell this put for $3.20. And have to hold $99.9 against every share of course, so your expected gain if all goes well is 3.37%! You're in luck and on 2/21, TQQQ is 108.14, and you have made 3.37%. TQQQ is up 8.2% in the same period
    3. February 21st - You're feeling great about yourself and ready to roll those sweet compounded gainz once more into the March expiry. Daddy's hungry. Here we gooooooo. TQQQ is at 108.14, and the March Expiry is 3/20 and the ~35 delta put strike is at $103 (delta actually 37.6 but P102 is too little delta). And for selling this put at $103 you get a whopping $5.60. Not too bad right? Gotta hold that $103 against it so you're aiming to pocket 5.44% this month. Sooo….on 3/20, TQQQ is at $35.51. Well shit…..fuck. So your contract is worth $67.49…you've taken a bath and lost $61.89 on a reserve of $103 a share. That's a loss of 60.09% in the month. TQQQ is down 67.16% in the same period. You sadly close out and roll your puts out to the next month.
    4. March 20th - you want to kill yourself but you remember you're in finance and still rich compared to 99% of the world. So you trudge onwards and upwards. Next up is the April 17th maturity. And on 4/17 the put that gives you a 39 delta is a strike of….35!!!! Wow jesus. You're playing a little more aggressive, you head closer to 40 than 30, but astonishingly the ATM PUT HAS A 39 DELTA!!!!!!! (for those people who don't know, ATMs are usually almost always 50 delta). So what's your reward for selling these sweet sweet puts? A whopping $6.50….fuck man. Vol is so high that you get 6.50 for your sale and only have to put $35 of cash aside per share. You're looking to eat well this month. You're looking at an 18.57% return for the period! Well say it ain't so, 4/17 rolls around and TQQQ is at fucking $66.73!!!!!!!! Ya boy done it. He's made a gain of 18.57% this period. TQQQ is up 87.9% in the same period. But fuck that, going long the underlyer is for idiots who are too stupid to hedge vol. The short put strategy is where it's at. You're just getting started. You're heating up & looking to the next month.
    5. April 17th - We're looking cautiously optimistic, dining at Red Lobster with our 18.57% last month. Ready for a repeat month so we can take ourselves to Catch next time. Next up is the May 15th maturity.  Most of the strikes for this expiry were actually created on April 20th, so you have limited options on April 17th. This forces you to choose between strikes of 0 and endings. The P60 gives you a 32 delta so that's close enough. For selling put strikes at 60, you get a square $5.00. Ok maybe Catch will have to wait. Since you're gonna have to hold $60 against each share, you're looking to make a return of 8.33% this period. Well, May 15th rolls around and fuck TQQQ is at 72.89 a share. You made all 8.33% this period! You're killing this so-called 'investing' thing! TQQQ is up 9.23% in the same period.
    6. May 15th - Alright. It's getting to the final months now of our backtest. You feel good. You feel strong. You're not looking at the scoreboard seeing where TQQQ is at. It's not over till the fat lady sings. Lets finish out strong. Looking to June our expiry is 6/19 and our 35 delta strike is at $67. You get $5.74 for selling this shit. Hold $67 against that and you're looking for an 8.57% return for the period. June 19 rolls around and TQQQ is at $93.92. Winner winner chicken dinner again. It's nice winning (almost) every month. You feel good inside. You've pocketed 8.57%. Nevermind that TQQQ is up 28.9% in the period.
    7. June 19th - Alright. So you still haven't checked the scoreboard but you're pretty sure you're behind as fuck right? Ok but wait! It's not the end of 2Q yet. We still have 12 days till June 30th!! Anything can happen in 12 days can't it? Will it? Maybe who fucking knows. So we look to the next maturity. Can my man get a 6/30 expiry option please?? Unfortunately not. The next expiry is July 17th. So we'll have to go with that. Let's fucking punt this one. We know we need a hail mary here, so lets sell a fucking ATM option and collect that primo premium. Why not. YOLO right? TQQQ is at $93.92 so your boy sells a put at 95. Fuck yeah. (he would've sold a put at 93 or 94 but those puts weren't created until June 22nd so….). Delta around 50 as expected. What do you get for your ballsyness? $8.55 that's what you get baby!!! Holding $95 against that gives you a cool 9% expected return woohoo. Alright you cross your fingers, pray and wait 28 days.  Jult 17th rolls around and TQQQ is at $111.84. Hell yeah…100% max gain yet again! You pocket 9% for that period. You glance over, and see TQQQ has returned 19.1% that same period; you take out a gun, and KYS.

So to recap. TQQQ from 01/02/2020 to 07/17/2020 returned 23.13% (and just for kicks, was up 8.5% the very next trading day).

In comparison, The Put shorting shit returned 1*(1+2.3%)*(1+3.37%)*(1-60.09%)*(1+18.57%)*(1+8.33%)*(1+8.57%)*(1+9.0%)-1 = -35.85%

JFC. Pay the $30k for a Bloomberg License or just use the one at your bank in your spare time. Do the rest of the backtests for the years and see for yourself what's up.

#1: I'm not sure I agree with the "if not when" catastrophic 90%+ drawdown, right now I think tech valuations are still cheap/attractive and nowhere near 2001 levels. Also keep in mind that the underlying stocks are the most profitable tech companies in the world, not hot high growth startups trading at 30x Revenues. In addition, TQQQ delevers rapidly with consecutive red days, so to get to -90% peak to trough would mean basically a peak to trough dot com bust. TQQQ needs to go up a bunch before going down because we are nowhere near there valuation-wise. That being said, there is some use of brain required before holding TQQQ indiscriminately in all environments, just like you say yourself that you would take assignment of the puts if there is a big drawdown and then be outright long the equity in a drawdown (because as shown above, if you stick to this put rolling strategy, you will capture 80% of the downside and capture 20% of the upside on the equity rebound). So that requires subjectivity and input - not just a blind algorithm. You do actually need to decide when to pull the trigger and call the bottom otherwise you're out a fuckton of upside

The backtest was section 2 but it's important enough I bumped it up to the top.

#3: You already know this, but to be clear, when you're rolling into lower and lower strikes (or cost bases as you like to say), you've destroyed capital with every roll and turn. And that destruction compounds. That's not to say that isn't what happens when TQQQ itself is down 50%, but don't act like it's some magic bullet that is helping you somehow come ahead.

Your example here ---> I.E. 250 contracts at a $162 strike requires $4,050,000 in cash collateral, but if you keep rolling the 250 contracts down, to eventually for example an $80 strike, that only requires $2,000,000 in collateral.

^^ So lets assume TQQQ was in the $170 context and it dropped to the $90 context, and so you rolled some $162 strikes into $80 strikes. Great, but my guy you've lost around 50% of your capital so yeah your 250 contracts only require $2,000,000 in collateral but you only have $2,000,000 after losing 50% of your capital. 

#4: You should think about this and underwrite assignment risk because it is real and you WILL get assigned and bought out of your positions earlier than you expected for sure. If you do this for any lengthy period of time, this will happen during down months. I can send you about 15 emails I got in 2014 from Fidelity when I was a young buck writing options every other week. This happens. A lot. (obviously fuck Fidelity and IBKR all the way now, but at Goldman they only let you use Fidelity unf)

#5: Volatility already addressed like you said

The other thing I would add, because I don't think you addressed it, is that it doesn't seem like there's a workaround for the punitive income tax treatment for this strategy - Even in the best environment for this strategy (low vol and TQQQ moving sideways month to month) - I'm not sure this strategy is going to come out ahead with that awful tax handicap to contend with, and also on the liquidity point that you mentioned in other posts - I think that's the real game changer and deal breaker because the point isn't to throw a couple hundred K into options every month but to plow 8 figures, so I don't think it's really feasible as a core retirement strategy the way just simply going long TQQQ is. Like I can't really sell out of my TQQQ position anyways since I'll face an 8 figure tax bill, but even if I did, I couldn't implement this strategy shorting $25mm notional of puts every month. And neither will you once you start compounding your retirement assets at 60% for the next 10 years and need to put $25mm to work!

 

FWIW I've started writing some covered calls on my TQQQ long in months where I feel like it's run up a bit. It's a nice way to get some cash income if you want a couple hundred K to buy things. And I've also used some of the proceeds to buy puts (basically a bastardized zero cost collar) to hedge some downside and allow me to buy more if the puts pay out. Other months I'll use the proceeds to buy ATM call options. Kind of all over the place, but it keeps things interesting. But as a matter of principle, I don't like systematic hedging because philosophically my PA should be is all alpha without any regard to beta. I just needed some money to buy a condo and selling the covered calls was the quickest riskless-iest way to get it.

 

Also - got a notification back on the original TQQQ threads & just realized you're the same person who called bullshit on my having $34mm in TQQQ. It's $40mm now, thanks to some puts and covered calls saving me a few bucks on the fade. Fuck you :)

  • Intern in IB - Gen
Nov 30, 2021 - 5:45pm

Have you been trying this strategy out in practice? I'm looking at open interest/volume for 30-45 DTE stuff and there is hardly anything, even ATM stuff. Would think that this lends to some struggles if you try to roll out? idk

Nov 30, 2021 - 6:09pm

I've been toggling between 14 DTE - 30 DTE and haven't had any trouble getting fills on selling a decent number of contracts for either. After my next position expires on 12/17, I'll look to roll out to closer to 45 DTE.

Moving forward 30-45 DTE will be my sweet spot. There's enough open interest for fills if you're looking 30 days out but the spreads get a bit wider if you go farther out than 30. Should still be able to get filled cuz you're not going to be selling 300+ contracts unless you're running this with millions; on the wide spreads you may just have to be a little more forgiving on your ask. 30 - 45 days is good sweet spot because it smooths out the weekly volatility and reduces frequency/occurrence of having to manage your positions if they get tested. Basically it's less management because you have a bigger downside buffer on the strike for equivalent deltas (i.e. the strike price of a 30 DTE 35 delta option is lower than it's weekly equivalent) and your breakeven for the trade is lower because you're collecting more upfront premium.

You'll probably make higher absolute returns overall selling weeklies but return profile is very close/negligible because you'll have more losers and more volatility on your weekly trades...rolling a weekly loser out an additional week on the day before TQQQ miraculously recovers before expiration is frustrating and will hit your ROI over the course of a year. So I think it's a wash honestly. TQQQ is obviously very volatile so monthlies just help to smooth returns/reduce need for management until a downtrend is established. Also, absolute theta decay speeds up in the period between 45 and 21 DTE so you'll be able to take profits on directionally successful trades pretty quickly and roll out the trade in time which will juice your IRR a lot.  

  • Intern in IB - Gen
Nov 30, 2021 - 6:34pm

Appreciate the thoughts. I would like to start this strat but unfortunately won't have enough capital to meaningfully diversify and this isn't possible while in IB. Best of luck though and thanks for sharing!

Dec 1, 2021 - 11:51am

Don't have a huge amount to add here, you could just have shortened the post by titling it "modern-day derivative version of the Martingale bet".  Beyond that, everyone who buys a stock at $50 down from $150 thinks they're getting an "unbelievable cost basis" right up until it goes to $10 (and yes, I recognize this is linked to an index but same idea - you're assuming you're timing the market).  

  • 1
Dec 1, 2021 - 12:01pm

Appreciate the contribution, but with all due respect I don't think you understand the principle here or how rolling short puts works. It is a capital efficient way to lower your breakeven cost basis on trades that go against you. You are averaging down without fronting more cash. Sure, you can view this as doubling down on a losing trade, but the principle is very simple. U.S. major markets historically always eventually recover from corrections or bear markets. You're not betting on a single ticker, you're betting on the 100 largest non-financial companies on the Nasdaq. The 100 best companies in the world. Ignoring all that, it's still a far better alternative than buy-and-hold on the underlying ETF during outlier periods of historic volatility if you have a hedge in place. Sure, I can understand if you want to avoid investing in a leveraged ETF via stock or options. That's fair, but an entirely different argument/discussion.

Dec 1, 2021 - 1:39pm

I do understand how it works, and the Martingale comparison was loose - obviously it's not an exact Martingale system, but it follows the same idea of re-running a failed bet until you win.  And yes, obviously QQQ (or TQQQ) is never going to 0, but assuming you can "call" a bottom through assignment is no different than calling a bottom through buying shares.  

  • 1
Dec 1, 2021 - 11:22pm

Re: your comment about markets going below your cost and then you having to roll the option forward for a credit

Given the recent market downtrend, isn't it possible to get caught with a loss? i.e. let's say your strike was $150 but the market goes down to $140. You're now in a loss position because the market price is much lower than the price you've sold the security for. Do you take the loss and reset for a few weeks out again? 

Dec 2, 2021 - 10:33am

Given the recent market downtrend, isn't it possible to get caught with a loss? i.e. let's say your strike was $150 but the market goes down to $140. You're now in a loss position because the market price is much lower than the price you've sold the security for. Do you take the loss and reset for a few weeks out again? 

Every instance where you roll out in time when the underlying goes against you (stock/ETF declines when you are short a put), you are taking a loss by closing out the trade and opening a new trade. This is what rolling is. The idea behind rolling out is you are giving yourself more time to be correct while also building a bigger downside price buffer on the stock/ETF--you get more time for the stock/ETF to bounce or even to stay flat, it just needs to stop going down rapidly. 

Put Roll Math: 

TQQQ is trading at $170. I write 100 contracts at a $162 strike on TQQQ that will expire on 12/17, which is let's say 3 weeks from now. I get $8.40 per contract. I collect $84,000 upfront in premium. The trade is collateralized by $1,620,000 in cash (100 contracts x $162/share x 100 shares). My breakeven on the trade, where I neither make or lose money, is when the TQQQ is at $153.6 ($160 strike price - $8.40 in premium).

TQQQ starts to tank. It declines 10% to $153 in a week. I decide that I'm comfortable holding my current short put options until TQQQ trades a little bit below my breakeven, let's say $150, and if it gets to $150 I'll want to roll out.

The following week TQQQ keeps edging lower and gets to $150. The put option I originally wrote for $8.40 in premium is now selling for $15.00, which means I have a paper loss of 78.6% on my premium, or a $66,000 loss. But remember, my breakeven is $153.6, so I'm only down ~2.3% on my trade ($150/$153.6 -1), which translates to a paper loss of $37,969 ($1,620,000 * ($150 / $153.6 -1)). It's only a paper loss until you decide to roll the trade, closing the original trade and open a new one to give yourself more time.

Why is there a difference between the two quoted losses? My option still has time value (extrinsic value/ theta value) until it expires (volatility also plays a role in the option's price but let's ignore). With each passing day that brings us closer to expiration, some of that time value decays and the option price losses value and declines, which is obviously good for the option seller (me). At expiration, the option will have no more time value and will be worth exactly the difference between my strike price ($162) and the price of TQQQ ($150). So, it will be worth $12 at expiration. I collected $8.40 upfront, so my loss will be $3.60 per contract or ~2.3% on the trade.

Ok. TQQQ is at $150 and on the day of expiration I roll my option out two more weeks in time, giving myself more time for a bounce or some stabilization in the markets. I buy my contracts back for $12/contract and open a new set of contracts at a slightly lower strike price of $155, 2 more weeks out in time (expires 12/31). Since market volatility has recently increased and I have added more time when I rolled, I'm able to sell the new $155 strike for $14.00 a contract. What is the significance of this? If TQQQ is above $155 by 12/31, not only do I collect my original full premium from the first trade ($8.40/contract) and get back my loss on the roll ($3.60/contract), I collect an additional $2.00 of profit on the new contract.

Beautiful. TQQQ bounces slightly in the next 2 weeks, from $150 to $155.50. The option expires worthless and altogether I made $104,000 on the trade. The TQQQ holder who hypothetically bought at $170 with the equivalent amount of cash that I used has paper losses of $138,176 ($1,620,000 * ($155.5/$170 -1)). Ok, how about a less idealistic outcome. 12/31 has arrived and TQQQ stayed flat-ish and bounced to $152 from $150, which is not enough for the option to expire worthless. Because this is still way above my breakeven of $141 ($155-$14), it's still a very profitable trade and instead of making $104,000, I still make $74,000 (premia math: +$8.40, -$12.00, +$14,00, -$3.00). Great, I book a profit and roll the trade out in time and keep shorting puts. Even if TQQQ had gone as low as $144.7, I would still make a little money on the trade overall. Meanwhile, the holder of shares would be down 14.8% or $241,056.

  • Works at Other
Dec 2, 2021 - 4:13pm

Isn't this half of an option wheel strategy? You're taking profits off selling puts. If you get assigned, you're betting on a price increase to sell in order to free up cash and continue selling puts. If you don't get assigned and keep rolling your puts, you have to buy back your initial option at a loss before you can write another. If TQQQ keeps falling then you lose a bit more money than you collect in premiums over time.

Dec 4, 2021 - 10:51pm

Wouldn't the circuit breakers in the market technically make it so it's an open interval (0,+inf) in price instead of clopen interval [0,+inf), thus you could get infinitely close to 0, but not actually touch it?  Or are the swaps structured in such a way that it could still go to 0 legit?

  • PM in HF - Other
Dec 5, 2021 - 2:02pm

Look up what occurred with XIV. There is zero circuit breakers to save the market from dealing with a meltdown on swap instruments, the people who manage TQQQ use them to their best ability to get you 3x. So trading options on a underlying portfolio that holds swaps…this is for pretty sophisticated investors who can follow it daily.

Dec 5, 2021 - 7:39pm

Gaffney's Numerical Assesment of Radness

This is fucking stupid. Why would you cap your upside, but not your downside, on TQQQ?

If you want to sell vol on TQQQ, run a poor mans covered call.

Because an ETF can't expire worthless.

You realize that covered calls are a bearish to neutral play right. Short covered call you are short delta, short puts you are long delta..

Dec 21, 2021 - 1:51pm

1) TQQQ can expire worthless, in that it can go to zero. This is noted in the prospectus.

2) Writing a call is bearish. A covered call is the same profit profile as short put, via put/call parity. Its a bullish, positive delta strategy. The practical difference between the two is that you can short options using your margin buying power without actually getting charged margin interest, picking up some carry.

3) A poor man's covered call is a diagonal spread using a long LEAP (usually ITM) call and a short call with a sooner expiry and higher strike. like all of the strategies discussed in this comment, its bullish and short vol. it has an advantage over the short put or covered call in that you don't have to deploy as much capital to mirror tqqq's covered call/short put upside, so you won't get your face ripped off if the trade goes against you. 

Dec 7, 2021 - 2:50pm

I have been using this exact process for the last 15 months.

The only difference being I use further out of the money strikes and weekly options.

I have averaged 40% for the last year.

There were around 4 drawdowns during the year, which I think I could hadle better in the future.

I expect at least 50% return next year, barring a dreaded long bear market.

Dec 8, 2021 - 11:15am

I think the difference for me is the buffer short puts gives me.

TQQQ could decline by 15% and I still make my money

TQQQ could move sideways and I still make my money

TQQQ can go up and I still make my money

If I have that kind of buffer and can still make  50 % - I am happy

Dec 12, 2021 - 7:30pm

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Dec 31, 2021 - 10:24am

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