Quote:
Originally Posted by stinkypete
If I understand what you're saying, that's not strictly mathematically true. It depends on your assumptions about volatility vs. expected return. But I'd be interested to see you expand on this.
Make any distribution of daily returns for the underlying that 1) isn't volatile enough to wipe out the 3x (or the shorts obviously win eventually), and 2) is 0EV, and you're going to win. Obviously if you're shorting something with a +EV underlying at low leverage, like shorting SPY at 1.05 leverage, you'll get killed, but shorting SPYx6 wins and at x7+ is a virtual doubleup.
Nothing anybody's going to pair-short for leverage decay purposes can reasonably have a sufficient ROI long-term. An underlying with a 1% SD needs a 2.5% annualized ROI (on the underlying) to make shorting the +3x breakeven and a 16% annualized ROI to make the pair breakeven over the next year. An underlying with a 2% SD needs a 10% annualized ROI (on the underlying) to make shorting the +3x breakeven and a 34% annualized ROI to make the pair breakeven over the next year. An underlying with a 3% daily SD needs a 56% annualized ROI to make the pair breakeven over the next year.
Obviously on any particular underlying, the annualized ROI can far exceed that (and/or the volatility can drop) for periods of time and bury you (or just be inherently awful like naked permashorting 3x spy because the ROI is too high for the low variance), but I don't see how you can expect ROIs anywhere near necessary to persist long-term for the 2%+ daily SD stuff.