Like in the previous scenario, the value of the 2X investment is clearly visible: while the 3X had lost nearly 27% of its value by the 8th, the underlying and the 2X had lost 9.4% and 18.4% respectively. In fact, the drop is so profound that even the single-day 20% increase in the underlying only gives the 3X a 2.5% edge in gains over the 2X, which now has a net gain of almost 14%.

In Conclusion

Examining the behaviour of the 3X and 2X over these scenarios, the argument on the choice between the 2X and 3X can be summarized thus:

“When it comes to choppy markets, a lower leverage factor has a significantly less pronounced value decay than a higher leverage factor”

It also bears noting in the choppy market scenarios in the case made for 2X, there was one single day where the underlying has a massive snap back in value. This illustrates the damaging effects of “value decay”: the 3X just about draw par to the 2X after several days of a loss in value that was greater than that seen in the 2X.

In that regard, the 2X investment was, in fact, the better choice to make a leveraged bet simply because it lost less value than the 3X and ended up par with the 3X after the recovery.

The seasoned investor would know that dramatic snap back in value is certainly not strange for Tesla but it’s relatively less pronounced for most other ‘mature’ stocks on days other than those immediately following an earnings call or major news. However, “choppy market” scenarios are a common feature to almost every stock.

Leveraged investments are risky plays, generally short-term investments and require active management. Ultimately, it is up to the investor to make a judgement call on what sort of days are up ahead with their investment and make a leveraged play.