Hedging TQQQ/UPRO with QQQ/SPY options : options


As options on leveraged ETFs do not seem like a good idea (leverage on leverage, high IV, much less liquidity than their underlyings, etc), has anyone tried to hedge their TQQQ/UPRO position by buying QQQ/SPY puts to create a form of protective put for their leveraged positions? Like, trying to offset the “NDX/SPX delta” of these investments.

I entered this hedge last week, as I was concerned of a potential sell off on Dec 31 or the first few days of ´22, while the IV rank was reasonable and the indexes were at at all time highs (SPY) or very close to, so I did not need to go too deep ITM (which gets expensive) to get the protection I wanted, even while my UPRO/TQQQ basis is fairly high*.

To decide, I played around in order to find the strikes and numbers of options which would offset what my TQQQ/UPRO positions would lose if SPX/NDX would go down, giving me a better chance to decide whether to liquidate or keep the investments. It seems to be playing out well so far, as the options have increased in value, but it leaves me with a few thoughts:

  1. There must be a better way to calculate the strikes/number of contracts required than just playing around with profit calculators and so on. If I understand, what I´m trying to do is similar to the “SPX delta” my broker calculates for my whole portfolio, only that it is referred to a specific investment (and to NDX, in the case of TQQQ), but I cannot find a tool to do it automatically.

  2. There must also be a reason why this is a bad idea or at least wouldn´t usually work, because all hedging discussions seem to be focused on TMF allocations. I imagine part of it has to do with the fact that options trading is not available to everybody, is risky, and all options tend to lose value over time, but TMF seems to be just as scary (if less involved) and is only indirectly correlated with equities (while these protective puts have guaranteed results if the leveraged equity ETFs go down).

  3. Once I figure out a better tool to evaluate this, it would be interesting to see how different options would perform as a hedge (e.g. LEAPs, ITM vs OTM, etc.).

It would be great to receive some input and commentary regarding this.

SPY: Jan 5 22 470P (x3, CB:$0.67×3) + Jan 5 22 474P (CB:$1.63)

r/options - Hedging TQQQ/UPRO with QQQ/SPY options

QQQ: Jan 5 22 391P (x2, CB:$0.61×2) + Jan 5 22 394P (CB:$0.98)

r/options - Hedging TQQQ/UPRO with QQQ/SPY options



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