How Swaps Can Create “3×” Returns (and Why Interest Matters)

Abstract

Swaps can mimic 3x daily index exposure by setting notional to be 3x collateral. Net return is 3x the move minus financing/spreads, plus interest on collateral.

Many people are curious about how someone can triple their investment returns in one day. This is possible through total return swaps. A swap is a contract that lets you get the returns of an index without actually owning it or even a multiple of it.

This post explains how a swap can boost your daily returns to nearly three times the original returns. It also covers how interest and fees can impact your actual results.

The simple idea: rent the index's return.

A total return swap (TRS) is a deal between you and a financial institution.

The bank agrees to pay you the total return of an index (price change + dividends) on a chosen “pretend size” called notional.

You agree to pay the bank a financing rate (interest) on that same notional, plus a small spread/fee.

That’s the basic idea. You are renting the index, and you pay a cost like interest for this service.

The key lever: notional exposure

To get close to three times the return, you pick a notional amount that is about three times your cash.

Example setup

You have $100,000 in cash collateral.

You enter a swap with $300,000 notional exposure to the NASDAQ-100 (or a similar benchmark).

The goal is that if the index goes up 1% in a day, you gain about 3% before costs.

This happens because the swap pays you the index return on $300,000, not on your $100,000.

A one-day example with interest and fees.

Let’s say in one trading day, the index moves from 100 to 103. That’s +3.00%.

1) Gross swap gain (the “3×” part)

Index return: +3.00%

Notional: $300,000

Gross return received: 0.03 × 300,000 = $9,000

So before costs, your $100,000 becomes $109,000 (a +9.00% day).

2) Financing cost (interest you pay on the financial instruments). Assume the swap financing rate is:

Overnight rate (like SOFR) 3.60% + spread 0.50% = 4.10% per year

Daily financing on $300,000 (using a 360-day convention, standard in money markets):

Daily rate ≈ 4.10% / 360 = 0.01139%

Daily cost ≈ $300,000 × 0.0001139 = $34.17

3) Collateral interest (the interest you earn). Your $100,000 in collateral is typically held in safer investments such as T-bills or money market funds.

Assume it earns 3.50% per year:

Daily rate ≈ 3.50% / 360 = 0.00972%

Daily interest ≈ $100,000 × 0.0000972 = $9.72

4) Net interest effect

Interest paid: $34.17

Interest earned: $9.72

Net drag: $24.45

5) Other fee swaps also have small extra costs, like bid/ask differences, internal hedging, and the bank’s spread. For simplicity, let’s estimate that these add up to about $10 per day.

Net result for the day

Gross gain: $9,000

Minus net interest: $24.45

Minus other costs: $10

Net gain ≈ $8,965.55

On $100,000, that’s +8.97% instead of +9.00%.

So yes, you can have three times the market exposure, but you still have to pay interest and fees. These costs reduce your gains a bit, but not completely.

What factors could cause this to go wrong in a short time?

This is what many people overlook: leverage also increases your losses.

If the index falls 3% in a day, your swap would lose about 9% of your collateral before costs. A few bad days like this can reduce your collateral so much that you might have to lower your notional or add more collateral.

Also, if the market moves up and down, daily compounding can hurt your results, even if the index ends up flat over a short period.

For Individuals

Most individuals find trading total return swaps harder than institutions do. Swaps usually need legal agreements, credit checks, collateral rules, and minimum sizes. Many people get similar exposure through products like leveraged ETFs, but these have their own risks.

Swaps can offer almost three times the exposure. You do this by setting the notional at about three times your collateral. Yet, your actual return is three times the daily move, minus financing and fees, plus any interest earned on your collateral.

For smaller investors, it’s usually better to use ETFs that handle the management for you, or to use options like calls and puts. For more on calls and puts, see the references below.

• Puts: https://www.quarkstochlorophyll.blog/putoptions/
• Calls: https://www.quarkstochlorophyll.blog/calloptions/

References:

• https://www.cftc.gov/node/255181
• https://www.cftc.gov/sites/default/files/filings/ptc/22/12/ptc123022twsefsef003.pdf
• https://www.cisi.org/cisiweb2/docs/default-source/atp-portal/training-material/certificate-in-securities/certificate-in-securities.pdf?sfvrsn=8aa646d511
• https://www.isda.org/collateral-management-sop/
• https://www.luc.edu/finance/interestrateswappolicy/

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