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, 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 ~35on 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 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