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I have a question about 2x and 3x stocks. As I look at some of them that have fallen since this February because of the bat soup bug. I have noticed some of them have really fallen hard. What is it about them that is different than regular stocks that would prevent them from eventually going back up to somewhere around where they were in the next couple of years? Take JNUG as an example. I asked Clay about it once and he said, "come join us." I read up on them a little bit with a couple of videos and they seem like a bad long term investment, but under the different circumstances that we are in with this virus economy where they tanked so hard, are they more likely than not to return to somewhat normal levels?
Can you help answer these questions from other members on NexusFi?
It was surprising to see SQQQ go from about 16 to a high of 32 and back down to 10 something, while TQQQ looks equally odd in a different way.
The proshares link provided by bxman has a good explanation that is not that easy to interpret.
This seems to be caused by differences between what i call the vanilla return versus the natural log return. If things are working "normally," the opposite of a 100% gain (EndPrice/StartPrice = 1) should be a 50% loss (EndPrice/StartPrice = .5. However, 1 and .5 are different numbers. The natural log makes both of these situations a positive or negative .69 - that's where the rule of 72 comes from.
There doesn't seem to be a simple way of taking advantage of that anomaly, but I've been thinking of looking at it more carefully.
In the scenario from the last 3 months, it would have been much better to short TQQQ than to buy SQQQ, in fact it would have been a pretty nice trade to short TQQQ and cover yourself by shorting SQQQ.
The biggest problem traders have is controlling risk.
These things are fine to day or swing trade. The leverage tends to attract a greedy crowd. SPY is better to play because you can easily adjust risk with liquid options, but every gun plays it's own tune.
leveraged ETs are designed to to provide leveraged long or short exposure to the daily return of various indices and asset classes
beyond a day there is return divergence because of the very nature of the ETFs construction
just like montage backed securities, and short optionality, they are also negatively convex
between the fees and convexity leveraged ETF naturally compress and bleed
which is why they have to buy into rallies and sell into breaks when they re-balance at the end of the day
there is strategy which seeks to capture the negative convexity associated with leveraged ETFs, called Hedged Convexity Capture where you short leveraged inverse equity ETPs and pair that short with a short position in TMV, an inverse leveraged long bond ETP
however, I'm not quite sure if someone who is not an experienced trader should venture into these kinds of strategies
I was going to say pretty much the same thing...
tldr;
These vehicles are for short term trading ONLY. The leverage and liquidity are good for day traders but due to the DAILY rebalancing and convexity these ARE NOT LONG TERM investment. Hope that makes some sense.
