SQQQ calls versus TQQQ puts

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Feb 21st, 2023 1:58 pm

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Feb 20th, 2023 10:24 pm

ElviBel [OP]: Member; Aug 25, 2019; 203 posts; 153 upvotes

Feb 20th, 2023 10:24 pm

SQQQ calls versus TQQQ puts

Curious, let's say if someone expect 10% swing (drop or rise) in QQQ within 6 months. What would be a best play in this case:

1. If 10% up: would it better to buy TQQQ calls with 6mo expiration; or SQQQ puts?

2. similar, if 10% drop - what is better SQQQ calls or TQQQ puts?

PS: I am not predicting anything, and aware that even buying TQQQ/SQQQ is 3x leveraged/risk, so this calls/puts is just in case one day there will be a hypothetical condition

3 replies

Feb 21st, 2023 10:16 am

Rhaegar: Deal Addict; Jan 28, 2012; 1766 posts; 660 upvotes

Feb 21st, 2023 10:16 am

Theoretically they should both perform the same for a given QQQ change, but It would depend on the trajectory of the move. Both of these etfs are leveraged daily and have slippage, but in the case of QQQ dropping hard, TQQQ should drop slightly faster than SQQQ rises because of the decay. In reality the options already price this in so it doesn't really matter.

Options volume at the strikes and expiries you are looking for are going to be a bigger factor, and in that case TQQQ tends to have higher volume, so your bid/ask should be better, especially if you are doing anything other than near the money for the monthly or upcoming weekly expiry.

Also since TQQQ is currently lower share price, you will have to do more total contracts to cover the same position size, so that may be an issue if commissions are a concern.

On the other hand, in the case of a truly extreme move, TQQQ can only go to zero but SQQQ could go to infinity. Again this is mostly priced into the options (SQQQ calls will be more expensive to account for this potential), but in terms of a raw $ move in the underlying SQQQ will move up further than TQQQ will move down in a big market dump. IF (IF) you timed it perfectly with short dated options and got a big black swan event, your payoff with SQQQ calls would be higher. TQQQ dropping 50% is $10 but SQQQ up 50% is $20+, even if you payed a dollar or two more for the SQQQ calls you can make a lot more in that case for example, just on a raw strike vs spot basis.

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Feb 21st, 2023 12:24 pm

Hooch77: Newbie; Nov 11, 2013; 34 posts; 42 upvotes; Waterloo

Feb 21st, 2023 12:24 pm

In my opinion, the correct answer primarily depends on the sequence of returns as these products are incredibly path dependent.

QQQ is currently ~$295 per share. So a 10% drop takes you to $265.50.

If QQQ were to decrease 0.5% for 21 consecutive days (taking us to $265.50), SQQQ would increase ~36.7%.

If instead, QQQ were to decrease 3% per day, followed by a 2% increase on the following day for 15 days (taking us to $265.50), SQQQ would increase by only ~29.2%.

That's a 7.5% difference in return over a very short time frame (<21 days). Over time, the difference in returns can be very significant.

+1

Feb 21st, 2023 1:58 pm

ElviBel [OP]: Member; Aug 25, 2019; 203 posts; 153 upvotes

Feb 21st, 2023 1:58 pm

Rhaegar wrote: ↑ Theoretically they should both perform the same for a given QQQ change, but It would depend on the trajectory of the move. Both of these etfs are leveraged daily and have slippage, but in the case of QQQ dropping hard, TQQQ should drop slightly faster than SQQQ rises because of the decay. In reality the options already price this in so it doesn't really matter.

Options volume at the strikes and expiries you are looking for are going to be a bigger factor, and in that case TQQQ tends to have higher volume, so your bid/ask should be better, especially if you are doing anything other than near the money for the monthly or upcoming weekly expiry.

Also since TQQQ is currently lower share price, you will have to do more total contracts to cover the same position size, so that may be an issue if commissions are a concern.

On the other hand, in the case of a truly extreme move, TQQQ can only go to zero but SQQQ could go to infinity. Again this is mostly priced into the options (SQQQ calls will be more expensive to account for this potential), but in terms of a raw $ move in the underlying SQQQ will move up further than TQQQ will move down in a big market dump. IF (IF) you timed it perfectly with short dated options and got a big black swan event, your payoff with SQQQ calls would be higher. TQQQ dropping 50% is $10 but SQQQ up 50% is $20+, even if you payed a dollar or two more for the SQQQ calls you can make a lot more in that case for example, just on a raw strike vs spot basis.

Decay is a big contributor for sure; looking into last 6mo for TQQQ (-30%) but SQQQ (-2%) which is not +30%. And because this is not linear (going ups then downs), so it's skewed.

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