Selling options on leveraged ETFs
Puts on TQQQ and other leveraged ETFs pay fat premiums. Here is what that premium bought in our replays, and why three tickers on the same index are one bet.
Why leveraged ETF premiums look so good
A 3x leveraged ETF moves about three times as much as its index each day, so its options are priced at roughly three times the volatility. A put on TQQQ at a given delta pays far more, as a share of the strike, than the same put on QQQ. For a seller looking at yield on collateral, that is hard to ignore.
The premium is high because the risk is high. The fair question is whether the premium overpays for that risk by more than an index option does, and what a bad trade looks like when it comes.
What the history says
In our paper book of cash-secured puts, the leveraged ETFs earned more than the index funds: about 7.4% a year on collateral against about 4.8% for QQQ and SPY. The worst single trades were the difference. The index puts had a worst trade of about -1.5% of collateral. The leveraged ones had worst trades of about -9% on two names and nearly -26% on another.
Put credit spreads on TQQQ with a 10% wing were the one leveraged spread cell that held up in our screens, and it was carried by a rising tape. A 3x semiconductor ETF read negative as a spread, and a single gap through a strike on it produced the largest loss in our records.
Leverage does not add a new bet
TQQQ, QLD and QQQ had a daily return correlation of about 1.00 with each other. Selling puts on all three is one bet on the Nasdaq written three times. Across a typical set of scanned tickers the average pairwise correlation was 0.46, which worked out to about two independent bets a week, not fifteen.
So spreading positions across leveraged wrappers of the same index does not diversify anything. It concentrates the same factor at a higher volatility. The guide on position sizing explains how to size by the maximum loss of a factor rather than by the number of contracts.
Decay is not free money
Leveraged ETFs lose value over time in choppy markets because of daily rebalancing, and some sellers treat that as an edge for put sellers or call sellers. The decay is already in the option prices. Our replays of call spreads on inverse and volatility ETFs, designed to harvest exactly that decay, lost money.
The honest summary: a leveraged ETF put is an index put with three times the volatility and three times the tail. It can be sized for, but it should be sized as if a -25% trade on its collateral will happen, because in our records it did.
Historical replays are not a forecast. Options can lose more than the premium collected. This is education, not a recommendation to trade anything.