TQQQ is Unlikely to Hit Zero in One Session

The following is from the comments section of last Sunday’s Kelly Letter.

Q. Subscriber Kenneth asked:

What happens if the QQQ loses 34% in a day? Does TQQQ go below zero?

A. I answered:

It would bottom somewhere just above zero, effectively eliminating the investor’s position.

However, this is unlikely to happen. From “Research Behind 6Sig and 9Sig” in the User Guide:

“…the maximum historical one-day gain of the Nasdaq 100 was 18.8% on January 3, 2001, and the maximum one-day loss was 17.8% on Black Monday, October 19, 1987. The average daily deviation was 1.14%.”

On top of that, the market now maintains circuit breakers to prevent a plunge to nowhere. From Vanguard’s post on the subject:

“Circuit-breaker points represent the thresholds at which trading is halted market-wide for single-day declines in the S&P 500 Index. Circuit breakers halt trading on the nation’s stock markets during dramatic drops and are set at 7%, 13%, and 20% of the closing price for the previous day. The circuit breakers are calculated daily.”

Thus, while it is theoretically possible for TQQQ to hit zero in a trading session, it is unlikely. We can say the same thing about almost anything in the stock market. For example, it is theoretically possible for GOOG to fall to zero in a session, but unlikely.

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