Outperform SPY/QQQ using SPY QQQ

This started by me thinking about the “if you can’t beat QQQ/SPY, invest in QQQ/SPY”. My question was, “what would be a sure-fire, no-brainer way to beat SPY/QQQ”. I think I might’ve found that way. My strategy is to use QQQ/SPY to beat QQQ/SPY. The correct way, I think, of doing this is by making use of LEAPS. Long-Term Equity Anticipation Securities, in the simplest terms, are just options with a far away expiration date. My thought process was, if you can leverage the same amount of money you would’ve put in SPY/QQQ using these LEAPS, wouldn’t you be able to return a greater percentage than SPY/QQQ in the long term? So, I back tested it using thinkBack on thinkorswim and got some interesting results. My strategy would be using 25% at-the-money leap calls on SPY, 25% in-the-money leap calls on SPY (using the nearest 25-multiple strike price, so 25, 50, 75, 100, 125, etc.), 25% at-the-money QQQ leap puts, and 25% cash for short-term plays. These are my results.

All of these results are holding every contract until expiration, as is the case with most LEAP contracts. All of the tests, starting in 2012, are using the first trading day of the year.

TEST 1

01/03/2012:

SPY: $127.50

QQQ: $56.90

Using this strategy, you would’ve put in the following orders (using a $100,000 portfolio so the numbers are simpler to calculate):

BTO 28 QQQ puts with JAN 2014 EXP and strike of 57 for 8.795 (Around $25,000 used, or 25% of portfolio)

BTO 14 SPY calls with DEC 2014 EXP and strike of 130 for 17.905 (25% of portfolio)

BTO 7 SPY calls with DEC 2014 EXP and strike of 100 (125 would be at-the-money so I decided to go to the next strike) for 35.50 (25% of portfolio)

01/17/2014

SPY: $183.64

QQQ: $87.88

QQQ puts expired worthless

SPY Calls total return so far: ATM calls P/L of $50,799.00 and ITM calls P/L of $33,880.00 (Both were opened with ~$25,000 each). Of course, at this point you already made a decent ROI, so, you could close all positions and restart strategy.

12/19/2014

SPY: $206.52

QQQ: $104.32

QQQ puts already expired.

SPY calls total return at EXP: ATM calls P/L of $82,033.00 and ITM calls P/L of $49,689.50.

Subtracting the QQQ puts, strategy returned total of ~$107,000 profit on $75,000 investment (100%+).

TEST2

01/02/2013

SPY: $146.06

QQQ: $67.20

BTO 26 QQQ 16 JAN 15 $68 Puts for 9.57 (25%)

BTO 17 SPY 18 DEC 15 $150 Calls for $14.74 (25%)

BTO 8 SPY 18 DEC 15 $125 Calls for 28.875 (25%)

01/16/2015

SPY: $201.63

QQQ: $100.82

QQQ puts expired worthless.

SPY ATM calls total P/L of $65,560.50 and ITM calls total P/L of $38,596.00

Again, decent ROI so could restart strategy at this point.

12/18/2015

SPY: 200.02

QQQ: $109.83

QQQ puts already worthless.

Total P/L of ~ $72,000 on a ~$75,000 investment.

TEST 3

01/02/2014

SPY: $182.92

QQQ: $87.27

BTO 23 QQQ 14 Jan 16 $88 Puts for 10.885

BTO 10 SPY 15 Dec 16 $175 Calls for 24.55

BTO 12 SPY 15 Dec 16 $183 Calls for 20.48

01/14/2016

SPY: $191.93

QQQ: $104.07

QQQ puts expired worthless

SPY total P/L is -$1949.00 (ITM P/L is -$65.00 and ATM P/L is at -$1,884.00)

12/15/2016

SPY: $226.81

QQQ: $120.40

QQQ puts worthless

Total P/L for strategy is ~$30,200 on ~$75,000 investment (ITM P/L $27,235.00 and ATM P/L $27,624.00 minus the -$25,000 for worthless QQQ puts expiry).

TEST 4

01/02/2015

SPY: $205.43

QQQ: $102.94

BTO 20 QQQ 20 Jan 17 $103 Puts for 12.445

BTO 9 SPY 15 Dec 17 $205 Calls for 26.165

BTO 9 SPY 15 Dec 17 $200 for 28.79

01/20/17

SPY: $226.74

QQQ: $123.25

QQQ Puts expired worthless

Total SPY P/L $3,541.50 (ATM P/L $1,138.59 and ITM P/L $2,403.00)

12/15/2017

SPY: $266.51

QQQ: $157.65

QQQ puts worthless

Total P/L for strategy is ~$40,900 for $75,000 investment (SPY ITM P/L $34,380.00 and SPY ATM P/L of $32,242.50 minus worthless QQQ puts for ~$25,000).

TEST 5

01/04/2016

SPY: $201.02

QQQ: $109.50

BTO 18 QQQ 19 JAN 18 $110 Puts for 13.89

BTO 10 SPY 21 DEC 18 $200 Calls for 25.16

BTO 6 SPY 21 DEC 18 $175 Calls for 39.95

01/19/2018

SPY: $280.41

QQQ: $166.34

QQQ puts expired worthless

ATM SPY P/L $57,305 and ITM SPY P/L $39,831 minus ~ $25,000 of worthless QQQ puts (decent ROI so could restart Strategy at this point)

12/21/2018

SPY: $260.47

QQQ: $161.08

QQQ puts worthless

Total P/L of ~$37,600 (ATM P/L $35,540 and ITM P/L $27,396 minus ~$25,000 of worthless QQQ Puts)

TEST 6

01/03/2017

SPY: $225.24

QQQ: $119.54

BTO 19 QQQ 18 JAN 19 $120 Puts for 13.05

BTO 10 SPY 20 DEC 19 $230 Calls for 24.05

BTO 6 SPY 20 Dec 19 $200 Calls for 41.09 ($225 calls weren’t being traded according to thinkorswim backtesting)

01/18/2019

SPY: $264.46

QQQ: $165.25

QQQ puts expired worthless (-$25,000)

ATM SPY P/L $20,495 ITM SPY P/L $17,525

12/20/2019

SPY: $320.73

QQQ: $211.71

QQQ puts expired worthless

Total P/L for strategy ~$89,700 on ~$75,000 investment (ATM P/L $66,990 and ITM P/L $47,970)

TEST 6

01/02/2018

SPY: $268.77

QQQ; $158.49

BTO 16 QQQ 17 JAN 20 $159 Puts for 15.405

BTO 8 SPY 18 DEC 20 $270 Calls for 29.90

BTO 6 SPY 18 DEC 20 $250 Calls for 41.85

01/17/2020

SPY: $331.95

QQQ: $223.38

QQQ puts expired worthless

SPY ATM Calls P/L $29,244 SPY ITM Calls P/L $25,566 (minus worthless QQQ Puts -$25,000)

Decent ROI, could restart strategy at this point?

12/18/2020

SPY: $369.18

QQQ: $310.06

QQQ puts expired worthless

Total P/L for strategy ~$77,200 on $75,000 investment (ATM P/L $56,232 ITM P/L $47,004)

TEST 7

01/02/2019

SPY: $250.18

QQQ: $154.88

BTO 14 QQQ 15 JAN 21 $155 Puts for 18.12

BTO 8 SPY 17 DEC 21 250 Calls for 32.25

BTO 5 SPY 17 DEC 21 225 Calls for 46.10

01/15/2021

SPY: $375.70

QQQ: $311.86

QQQ Puts Expired worthless

SPY ATM P/L $76,676 SPY ITM P/L $52,707.50 (Over 100% ROI but did not beat QQQ, could restart but best option would be to hold in this scenario, in my opinion)

Current (10/28/2021)

SPY: $457.39

QQQ: $383.49

QQQ Puts expired Worthless

Total P/L for strategy ~$208,100 (currently outperforming both SPY and QQQ)

ATM Calls P/L $140,248 and ITM Calls P/L $93,230 (minus worthless QQQ puts ~$25,000)

5 Likes

great data i’m going to implement this in addition to what i’m already doing.

Interesting data, thanks. Appreciate you have backtested this back to 2012, but would this still stand up during a market in which SPY/QQQ moves sideways or downwards for an extended period of time? 2012 to now has really been one long bull run with a couple of short periods of instability. Do the returns from the puts make up what you’re losing on the calls in such a situation?

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From what I’ve read, bear markets on average last up to 10 months and take 3.5 years to recover. The far out exp on the puts is a hedge against the potential bear market (could sell PMCC’s on the leap calls if you decide to buy deeper itm to lower your breakeven and could also make the put ITM and sell PMCP’s or credit spreads if you do catch a bear market while playing the strat. Play around with it) plus the 25% cash ensures your whole portfolio isn’t completely wiped out if you just yolo’d into spy leaps. @kelli20

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