Shorting SQQQ for long term

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Ninjadetector
Posts: 7
Joined: Sat Jan 22, 2022 12:20 pm

Shorting SQQQ for long term

Post by Ninjadetector »

Hi

I am very bullish with large cap growth (even with the recent market pull back). Instead of buying TQQQ, what if I short SQQQ for long term ? The volatility decay works with you along with a bullish bet. If I can continue invested in 50% short position at with the rest of portfolio in cash and rebalance monthly then returns would be better. The worst for S-SQQQ (Short) is better than L-TQQQ (Long). I know TQQQ might be better over this time horizon ( but looking to minimize taxes and drawdown when I am dollar cost averaging)

Portfolio 1 is shot SQQQ at 50%

Portfolio 2 is long TQQQ at 100%

Portfolio 3 is QQQ at 100%

Last 10 years -


https://www.portfoliovisualizer.com/bac ... ion5_1=100


Since 2018 -

https://www.portfoliovisualizer.com/bac ... ion5_1=100




If you factor in dollar cost averaging then you can even beat TQQQ long term:

https://www.portfoliovisualizer.com/bac ... tion4_1=40



Can I limit my risk by buying a monthly call option (30 days out) for 2x current strike price (so I only are at risk up to 2x spike. will pay 1% (=$20 / monthly) to protect from infinite risk. I am thinking this is equal to 12% of return. So I need to make 12% more in returns to be neutral.

Please poke hole in my logic. I am fairly new to trading/investing.

Real worst case scenario:

August 2015: flash crash where SQQQ rose 121% from its low water mark. That means if you were rebalanced to a -$100,000 position, you would need 90% (Schwab and IBKR requirement) of $121,000 in cash which is $108,900 PLUS your original margin requirement ($90,000). That's a total of $198,900 in cash in order to initiate a $100k short of SQQQ and hold it through its worst blow up without getting margin called.

Thus, you can only hold roughly 50% of SQQQ compared to using 100% of that cash potentially to buy shares of TQQQ. The 90% margin requirements of Schwab and IBKR for shorting 3x ETFs pretty much force you to have 2x cash compared to your short position in SQQQ if you're fully rebalanced at the current price. That's based on historical crashes and could be worse with a bigger flash crash.

Am I understanding those margin requirements correctly? Someone let me know if I'm wrong, not an experienced short seller.



Regarding taxes:

In theory you might "never" close a short SQQQ position, though. So although you pay STCG, it's deferred. In the meantime, you can redeploy the gains/proceeds of the short as you wish, say shorting more SQQQ or buying other assets including TQQQ - you don't need to close positions to rebalance your portfolio like you would with holding TQQQ long. The hope would be that after several years of compound growth the additional gains will outweigh the extra tax burden. If you don't want the SQQQ positions any more you could just let them decay to zero over time without shorting more and never close them and take the tax hit.
drk
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Re: Shorting SQQQ for long term

Post by drk »

I skimmed and didn't see you comment on cost to borrow, so I'm sending this back for re-work.

Also, welcome to the forum! We don't really do stuff like this here. You might have luck in one of the threads about HEDGEFUNDIE's Excellent Adventure (HFEA), but I doubt any of them are shorting a leveraged fund. If you're interested in a more productive path, check out the Getting Started wiki page.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
learntoinvest123
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Joined: Sat Aug 29, 2020 9:20 am

Re: Shorting SQQQ for long term

Post by learntoinvest123 »

Obvious ideas such as taking advantage of volatility decay by shorting have been played out. You are a few years too late to this game.

It is going to be hard to find stock to borrow to short. Even if you find some, the broker will probably charge you money for borrowing it.

You have to be way ahead of the game to short. For example, you could have shorted some when Nasdaq was at its highs. You won't find anything available say when Nasdaq hits lows (when it would have been most profitable to short). Markets are too efficient to hand out easy money :D
rockstar
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Re: Shorting SQQQ for long term

Post by rockstar »

Volatility is still high.

https://finance.yahoo.com/quote/%5EVXN

I prefer it in the low 20s, not low 30s.
Impatience
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Re: Shorting SQQQ for long term

Post by Impatience »

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Last edited by Impatience on Mon Apr 03, 2023 9:44 pm, edited 1 time in total.
learntoinvest123
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Re: Shorting SQQQ for long term

Post by learntoinvest123 »

Op, is your comparison Apples-to-Apples? You are using 150% cash, in one scenario.

Also, sustained down turn would mean you would have to keep coming up with cash to meet 150% level which means to compare both, you need to add cash to the other portfolios.
Topic Author
Ninjadetector
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Joined: Sat Jan 22, 2022 12:20 pm

Re: Shorting SQQQ for long term

Post by Ninjadetector »

drk wrote: Sat Jan 22, 2022 2:15 pm I skimmed and didn't see you comment on cost to borrow, so I'm sending this back for re-work.

Also, welcome to the forum! We don't really do stuff like this here. You might have luck in one of the threads about HEDGEFUNDIE's Excellent Adventure (HFEA), but I doubt any of them are shorting a leveraged fund. If you're interested in a more productive path, check out the Getting Started wiki page.


Thank you for the reply. HTB is fairly low at 1 to 2 % depending on broker and market condition.
Topic Author
Ninjadetector
Posts: 7
Joined: Sat Jan 22, 2022 12:20 pm

Re: Shorting SQQQ for long term

Post by Ninjadetector »

learntoinvest123 wrote: Sat Jan 22, 2022 4:57 pm Obvious ideas such as taking advantage of volatility decay by shorting have been played out. You are a few years too late to this game.

It is going to be hard to find stock to borrow to short. Even if you find some, the broker will probably charge you money for borrowing it.

You have to be way ahead of the game to short. For example, you could have shorted some when Nasdaq was at its highs. You won't find anything available say when Nasdaq hits lows (when it would have been most profitable to short). Markets are too efficient to hand out easy money :D
:D thank you. I am just evaluating long term this strategy vs buying TQQQ long term
Topic Author
Ninjadetector
Posts: 7
Joined: Sat Jan 22, 2022 12:20 pm

Re: Shorting SQQQ for long term

Post by Ninjadetector »

learntoinvest123 wrote: Sun Jan 23, 2022 9:50 am Op, is your comparison Apples-to-Apples? You are using 150% cash, in one scenario.

Also, sustained down turn would mean you would have to keep coming up with cash to meet 150% level which means to compare both, you need to add cash to the other portfolios.
Thank you so much for pointing it out. I have redone the math and seems TQQQ long term would be better even with some hedging cost (like shorting the Russel 2000 as a hedge).
Topic Author
Ninjadetector
Posts: 7
Joined: Sat Jan 22, 2022 12:20 pm

Re: Shorting SQQQ for long term

Post by Ninjadetector »

Impatience wrote: Sat Jan 22, 2022 5:21 pm
learntoinvest123 wrote: Sat Jan 22, 2022 4:57 pm Obvious ideas such as taking advantage of volatility decay by shorting have been played out. You are a few years too late to this game.

It is going to be hard to find stock to borrow to short. Even if you find some, the broker will probably charge you money for borrowing it.
SQQQ costs less than 1% to borrow usually. Availability is not an issue.

OP I employ this strategy in my taxable account. The gains have been excellent in the past year though once you factor in tax treatment it’s probably not much better than just going 3x long. Plus you may get margin called which is annoying. Happened to me twice so far. Didn’t impact my returns much but still stressful.

Thank You so much> I agree, I think I will go with TQQQ with some hedging. Have a look at my math and let me know I got something wrong.

https://www.portfoliovisualizer.com/bac ... bol6=DXSSX
learntoinvest123
Posts: 145
Joined: Sat Aug 29, 2020 9:20 am

Re: Shorting SQQQ for long term

Post by learntoinvest123 »

All is well when markets keep going up year over year. See what happens to QQQ from 2000 to 2010.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

Now imagine what would happen to TQQQ or SQQQ during that decade. A long downturn will destroy TQQQ due to volatility decay while shorting SQQQ means you will need to keep adding cash to escape margin calls.

Leverage is great when things go your way. If you really have unlimited cash, shorting SQQQ is always better since eventually it will under perform and be hit with volatility decay (That is assuming, markets always go up multi-decades).
Marseille07
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Re: Shorting SQQQ for long term

Post by Marseille07 »

Ninjadetector wrote: Mon Jan 24, 2022 10:41 pm Thank You so much> I agree, I think I will go with TQQQ with some hedging. Have a look at my math and let me know I got something wrong.

https://www.portfoliovisualizer.com/bac ... bol6=DXSSX
I don't understand what you're doing. -100 on IWM, really? Are you sure you didn't mean to do -100 on CASHX?
no simpler
Posts: 116
Joined: Sat Jul 13, 2019 4:54 pm

Re: Shorting SQQQ for long term

Post by no simpler »

Shorting SQQQ sounds really risky, plus you have to pay margin costs to short. I also wouldn't buy and hold TQQQ, because leverage decay during a protracted tech crash could lead to an extreme drawdown that would be hard to recover from. If you're bullish on tech/growth, might be better to run an (unlevered) momentum strategy.

This is just a strategy (https://app.composer.trade/symphony/HAx ... XQ/details) that every month selects the top 2 mega tech stocks from a basket based on their trailing 20 day return.
Image
Image

It has a lot lower drawdowns than TQQQ, while still getting higher annualized returns than QQQ. At least in backtest period, the momo strategy has better risk adjusted returns, and it's done way better during the last 3 months with the correction in tech.
Topic Author
Ninjadetector
Posts: 7
Joined: Sat Jan 22, 2022 12:20 pm

Re: Shorting SQQQ for long term

Post by Ninjadetector »

Marseille07 wrote: Tue Jan 25, 2022 1:48 am
Ninjadetector wrote: Mon Jan 24, 2022 10:41 pm Thank You so much> I agree, I think I will go with TQQQ with some hedging. Have a look at my math and let me know I got something wrong.

https://www.portfoliovisualizer.com/bac ... bol6=DXSSX
I don't understand what you're doing. -100 on IWM, really? Are you sure you didn't mean to do -100 on CASHX?

Portfolio 2 in that link is mean to short the Russel 2000 IWM as a hedge to TQQQ prolonged draw down. so -100 IWM and 105 Cash X ( I am always assuming that I will have 5% in cash and 95% TQQQ).

Please let me know if I am doing this wrong.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Shorting SQQQ for long term

Post by Marseille07 »

Ninjadetector wrote: Wed Jan 26, 2022 12:43 am
Marseille07 wrote: Tue Jan 25, 2022 1:48 am
Ninjadetector wrote: Mon Jan 24, 2022 10:41 pm Thank You so much> I agree, I think I will go with TQQQ with some hedging. Have a look at my math and let me know I got something wrong.

https://www.portfoliovisualizer.com/bac ... bol6=DXSSX
I don't understand what you're doing. -100 on IWM, really? Are you sure you didn't mean to do -100 on CASHX?

Portfolio 2 in that link is mean to short the Russel 2000 IWM as a hedge to TQQQ prolonged draw down. so -100 IWM and 105 Cash X ( I am always assuming that I will have 5% in cash and 95% TQQQ).

Please let me know if I am doing this wrong.
Gotcha. Well then there's nothing wrong, but I am not a big fan of the idea to go 3x NASDAQ then -1x Russell 2K.

If you like TQQQ, why not just go to cash on 200D MA or something along those lines?
Topic Author
Ninjadetector
Posts: 7
Joined: Sat Jan 22, 2022 12:20 pm

Re: Shorting SQQQ for long term

Post by Ninjadetector »

no simpler wrote: Tue Jan 25, 2022 6:44 am Shorting SQQQ sounds really risky, plus you have to pay margin costs to short. I also wouldn't buy and hold TQQQ, because leverage decay during a protracted tech crash could lead to an extreme drawdown that would be hard to recover from. If you're bullish on tech/growth, might be better to run an (unlevered) momentum strategy.

This is just a strategy (https://app.composer.trade/symphony/HAx ... XQ/details) that every month selects the top 2 mega tech stocks from a basket based on their trailing 20 day return.
Image
Image

It has a lot lower drawdowns than TQQQ, while still getting higher annualized returns than QQQ. At least in backtest period, the momo strategy has better risk adjusted returns, and it's done way better during the last 3 months with the correction in tech.

Thank you so much. Great analysis and website. Is there an etf out there that mimics this strategy? I may not be able to actively trade to achieve its results.

I also have two different strategies that Hedge against TQQQ severe drawdowns using Russel 2000 short or UVXY in the link below. What do you think of them?

https://www.portfoliovisualizer.com/bac ... ation6_1=5
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Shorting SQQQ for long term

Post by Marseille07 »

You can't use TQQQ because the data since 2011 is too rosy. You need to use something that existed in 2008.

Even simply holding QQQ would have generated 21%/year. It is unreasonable to expect this to continue.
spiyer99
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Joined: Sun Apr 26, 2020 6:42 am

Re: Shorting SQQQ for long term

Post by spiyer99 »

For those in this strategy now, how is it going? Is this still a viable play?
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