Welcome to this guide on harnessing the natural decay in leveraged ETFs as a strategic edge, rather than fighting against it. We’ll assume you have a basic understanding of options and are comfortable using at-the-money (ATM) strikes as a conservative reference point—advanced users can tailor strike selection to their own edge.
Overview of Leveraged ETFs
What they are and how they reset
• Leveraged ETFs (e.g.
TQQQ, SQQQ) aim to deliver a constant multiple (×2 or ×3) of daily returns of an index.
• Inverse ETFs provide –2× or –3× daily exposure without using options.
• Daily reset and compounding create path dependency, leading to “decay” over multi-day holds.
The Decay Mechanism
A quick reminder
• Volatility drag (aka “gamma decay”) causes leveraged ETFs to underperform their stated multiple over longer horizons in sideways or choppy markets.
• The longer you hold beyond one day, the more cumulative leak you face.
Using Decay as a Tailwind
• Rather than avoiding decay, structure trades to benefit from it when your directional bias is robust.
• Combine traditional technical setups with the telescoping of leverage + decay to magnify returns on the correct market view.
• Small notional capital can control large effective exposure via a leveraged ETF + ATM option.
Strategy Execution
• To short the market: buy long puts on a bullish leveraged ETF (e.g.TQQQ puts).
• To go long the market: buy long puts on an inverse leveraged ETF (e.g.SQQQ puts).
• Use ATM options for defined risk and to capture both directional move and extra tailwind from ETF decay.
• Position size example: controlling $10k of market exposure might only require $200–$500 in option premium, depending on expiry.
Time Horizon for Decay Tailwind
• Empirically, decay compounds meaningfully over more than one trading day.
• Short-term horizons (2–5 trading days) often capture a useful drift without excessive market risk.
• Back-test your preferred ETF to find the sweet spot for your volatility regime.
High-Volume ETFs to Watch
Bear (inverse) ETFs:
•BITI • 
LABD • SQQQ • TZA • SOXS • SPXS
Bull (long) ETFs:
•BITU • LABU • TQQQ • TNA • SOXL • SPXL
Closing Thoughts & Disclaimers
This tutorial highlights how to position decay as a tailwind when your outlook aligns with market direction. Leveraged instruments and options carry amplified risks—only trade with capital you can afford to lose and always define your risk parameters before entry.
Overview of Leveraged ETFs
What they are and how they reset
• Leveraged ETFs (e.g.
TQQQ, SQQQ) aim to deliver a constant multiple (×2 or ×3) of daily returns of an index.• Inverse ETFs provide –2× or –3× daily exposure without using options.
• Daily reset and compounding create path dependency, leading to “decay” over multi-day holds.
The Decay Mechanism
A quick reminder
• Volatility drag (aka “gamma decay”) causes leveraged ETFs to underperform their stated multiple over longer horizons in sideways or choppy markets.
• The longer you hold beyond one day, the more cumulative leak you face.
Using Decay as a Tailwind
• Rather than avoiding decay, structure trades to benefit from it when your directional bias is robust.
• Combine traditional technical setups with the telescoping of leverage + decay to magnify returns on the correct market view.
• Small notional capital can control large effective exposure via a leveraged ETF + ATM option.
Strategy Execution
• To short the market: buy long puts on a bullish leveraged ETF (e.g.
TQQQ puts).• To go long the market: buy long puts on an inverse leveraged ETF (e.g.
SQQQ puts).• Use ATM options for defined risk and to capture both directional move and extra tailwind from ETF decay.
• Position size example: controlling $10k of market exposure might only require $200–$500 in option premium, depending on expiry.
Time Horizon for Decay Tailwind
• Empirically, decay compounds meaningfully over more than one trading day.
• Short-term horizons (2–5 trading days) often capture a useful drift without excessive market risk.
• Back-test your preferred ETF to find the sweet spot for your volatility regime.
High-Volume ETFs to Watch
Bear (inverse) ETFs:
•
BITI • LABD • SQQQ • TZA • SOXS • SPXSBull (long) ETFs:
•
BITU • LABU • TQQQ • TNA • SOXL • SPXLClosing Thoughts & Disclaimers
This tutorial highlights how to position decay as a tailwind when your outlook aligns with market direction. Leveraged instruments and options carry amplified risks—only trade with capital you can afford to lose and always define your risk parameters before entry.
Note
The levered long Bitcoin ETF is BITU - sorry for the misprint!
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Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.