Volatility drag, volatility tax, slippage or whatever else we call it shows up in leveraged ETFs and becomes more apparent the longer the timeline. But the recent implosion in $NUGT is allowing us to see how this effect can play out in a shorter time window:
Using the instrument from which $NUGT is derived, $GDX, if you measure the % gain it would have to achieve to get back to its highs (from around 23.70 right now to about 31.80 on 8/11-8/12) it calculates to around 34%.
If you take 3x the 34% (=102%) that would only get $NUGT back to around 26.25, nowhere near its corresponding high from 8/11-8/12 of 35.80. For NUGT to get back to its August highs from its current level around 13, it would need to add 175%.
This is one of the reasons I’ve been aggressively selling calls at strikes near the August highs on big moves up. It will be very difficult (and will require a much bigger corresponding move in gold and the miners) for $NUGT to challenge old highs.
Options Bistro 