TQQQ Time Decay?

Here's something I don't understand. If I were to go out and try to get 3x leverage on the NASDAQ directly, I would buy in on margin, essentially taking out a loan to buy more QQQ. Over time, my returns should be a little less than 3x the NASDAQ because I have to pay interest on the loans I've taken out.

TQQQ does not achieve leverage in this way, but instead uses options. I'm not sure how it works but I think that TQQQ essentially purchases enough QQQ call options to achieve 3x exposure to the NASDAQ, so no interest payment on margin. But instead, as the call options get closer to expiry, time decay sets in and the options decrease in value. Am I thinking about this the right way? It seems like this would be a strong reason to avoid holding TQQQ over the long term.

 
Most Helpful

TQQQ is daily reset to 3x exposure. It is done synthetically through options as you have said. This is priced in to the product management fee, and is not what people normally mean when they talk about decay in regards these leveraged instruments. 

The difference vs buying QQQ on margin is that your leverage from the margin does not reset daily. If you buy QQQ on margin, and the market moves up, your effective leverage will fall. TQQQ daily reset means in an upward market, you will get compounding and achieve overall returns greater than 3x.

In a falling market, when you have bought QQQ on margin, your effective leverage will increase. TQQQ will again maintain constant 3x exposure. This is why I have previously argued on this site that it is stupid to buy ETFs on margin in an attempt to replicate leveraged ETFs.

This reply is getting rather long now, but what people commonly mean by decay with leveraged ETFs is that after sideways trading, with small ups and small downs, the leverage will cause the ETF to underperform. Aka volatility drag

 

Right so like beta decay when you got ups and downs going on, but what about time decay on the underlying options? Is that a risk or is that hedged out by buying/selling equal amounts of options so you are theta-hedged? (I think theta is the right greek here)

 

Yes that is theta and decays until option expiry. As already established, TQQQ uses options to achieve the 3x exposure. So there will indeed be some element of theta decay. However, as an end buyer of the ETF, you trust that the product is being sufficiently managed to achieve 3x daily reset exposure. The costs of maintaining this product, such as theta decay and rolling the options, is reflected in the relatively high management fee for this ETF.

 

If we are in a stagnant, high volatility environment, this etf could get wiped out. 

 

Nope not how it works. As a fund with 18 BILLION AUM, most of which is day/swing traders moving in and out of the fund, even a drastic "crash" would not wipe out the fund unless people lost interest in the market entirely. You'd have bigger issues to worry about at that point. For an example, look at the fund inverse fund SQQQ...still alive and kickin it...

 

It holds the underlying, like QQQ (which is the components of the Nasdaq 100 index) - plus some treasuries and cash - then levers it all up with a variety of swaps to get that 3x exposure that you want. So you have call it $18 billion in assets (i.e. the stocks mentioned plus cash + treasuries) and total exposure, give or take, of about $50 billion once you add in the $32billion of index swaps on the Nasdaq 100. Should help give you a sense of what's going on underneath the surface here. These aren't call options, to be clear. 

What has happened is that markets have gone up in basically a straight line. The why is less relevant to these products than the what and how, in my view. Volatility has been crushed, tech has been in a persistent and unrelenting uptrend for awhile. On a daily, weekly and monthly basis it just keeps going up. It's the perfect scenario for these funds - you go up 2% - reset to that base - move up another 1% - resent to that base - move down .5% - then up 1% - I don't need to keep going, you can see how this works. Even when you got a larger down move, you could add to your holdings - and it would go straight back up - thus mitigating all of the risks we talk about on here about leverage traps, vol decay, etc. 

The biggest risk to these funds is high sustained volatility over time, combined with a market that moves relatively sideways - or even up, but extremely volatile on the way there. There's a table in the prospectus that shows it clearly - but you effectively chop yourself to pieces with the leverage and daily resets. Not that it will happen - but it CAN happen. 

Look - the returns of TQQQ have been absurd. I applaud those who've pulled it off. There's also some fun trading strategies I've seen on here (via put options, etc.) that could be worth a look if that's your thing. But just be aware that you are buying a vehicle that is made for active trading and sophisticated investors - it's not equivalent to buying the QQQ's with a bit of leverage. Period. 

 

Well done sir, many of us written this for months. Yet people seem to think "market cap" means something in these funds. Many people lack the understanding of liqudiity/decay/spillage. The main TQQQ options guy explained his strategy and I mentioned he's far more sophisticated than most people. 

I also explained to him you could get into a "liquidity trap" like currently where you sold options at a cheap value and now have to buy either at a high value or see the VIX rip in your face...as we all know the VIX can crash any day...none of this is easy stuff to manage. But some people who trade TQQQ on here for sure can do it and manage it daily and are very sharp about it but does not mean everyone should follow them.

 

Sequi eos autem rerum dicta deserunt explicabo. Sunt porro incidunt tempora necessitatibus nihil numquam quam dolorem. Magni dolorum nostrum dolorem. Doloremque repellat tempora culpa.

Dicta saepe dolor maiores ut quia. Est temporibus perferendis libero commodi sint ex earum. Rerum quaerat labore dolor omnis.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Secyh62's picture
Secyh62
99.0
4
Betsy Massar's picture
Betsy Massar
99.0
5
dosk17's picture
dosk17
98.9
6
DrApeman's picture
DrApeman
98.9
7
GameTheory's picture
GameTheory
98.9
8
CompBanker's picture
CompBanker
98.9
9
kanon's picture
kanon
98.9
10
Linda Abraham's picture
Linda Abraham
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”