$XL2CSOPHYNIX(07709.HK)$Sandisk(SNDK.US)$Micron Tech(MU.US)

Why are 2x leveraged products not suitable for long-term holding?

07709 has been plummeting continuously, from 190 down to over 60, which is terrifying. I've been wanting to write an article about leverage risks.

First, understand the underlying logic of 2x leveraged products: 2x long is not a simple *2. In reality, it uses Daily Leverage Reset, with returns calculated on a daily compounding basis. Therefore, long-term holding mainly faces two issues.

1. Leverage Decay (Volatility Drag)

For example: Up 10% on the first day, down 10% on the second day.

Underlying stock: 100 → 110 → 99, a loss of only 1%.

2x product: 100 → 120 → 96, a loss of 4%.

Because the 2x product resets its leverage daily. If the market is in a volatile pattern of up one day, down the next over the long term, each fluctuation consumes a portion of the NAV. So, the more intense the volatility and the longer the time, the more obvious the leverage decay (Volatility Decay) becomes.

2. NAV Compression (Recovery Drag)

The biggest problem isn't the drag, but the NAV compression.

For example: SK Hynix falls from 100 to 50. The underlying stock only needs to rise 100% to get back to 100.

However, due to daily compounding and leverage effects, the NAV of the 2x product may have already fallen from 100 to around 30. Even if SK Hynix later doubles again, the 2x product would only rise from 30 to 60, still far from the original 100.

So, we've also seen people calculate that the underlying stock is almost back to breakeven, while the 2x product is still far away.

Therefore, the biggest risk of leveraged products is not actually "falling fast," but rather:

1. High volatility oscillations will continuously generate leverage decay;

2. Prolonged declines will continuously compress the NAV, increasing the required future gain to break even.

2x products are more suitable as trend trading tools, not for long-term holding waiting for a recovery.

The memory sector has experienced a magnificent main upward wave, entering a mid-term phase with excessive volatility. StockPro SanDisk warned early on to deleverage and hold the underlying stock.