Please go beyond idle chitchat and feel free to criticize where I have it wrong. I'll even start. In my goal of exploring volatility drag, I didn't provide realistic daily changes.
What if markets moved -8%, +5%, -5%, -10% ... like the S&P 500 did on March 9 to 12. Net loss -17%.
UPRO moved -23%, +16%, -15%, -29% during March 9 - 12. That's a net loss of -46%.
S&P 500 are real assets that can recover to the prior value. With one +20%, it reverts to the mean (from the above). But UPRO traces a path 3X that of the S&P 500, with no reversion to the mean. It goes up 3x20% = +60%, but still winds up -14% down even after S&P 500 has recovered. I'd like to understand and possibly mitigate that volatility drag.
One approach mentioned earlier was to inject the difference in 1X and 3X losses as a new cash infusion. With the numbers for Mar 9-12, it looks like about 1/3rd of UPRO's value needs to be kept in cash, and made available, to offset volatility drag.
When VOO / UPRO performs -8% and -23%, that requires +16% added cash (of UPRO's original value)
For VOO / UPRO gaining +5% and +16%, that allows withdrawing -11% from UPRO back into cash
Then VOO / UPRO lose -5% and -15%, requiring +10% cash injected to UPRO.
Finally, VOO / UPRO lose -10% and -29% and the cash need reaches a staggering +19% from one day (Mar 12).
It looks like canceling volatility drag in this case requires +36% additional cash. Scaling that from 136% down to 100%, and I get roughly 3/4ths invested and 1/4th waiting in cash. An even deeper worst case scenario might require 1/3rd or even 1/2 in cash to offset even deeper cumulative drops in UPRO over time.
I don't know if this is actually sustainable though. Let's say you had a sustained drawdown over the course of several months (more like 2008). Because you are "resetting" UPRO by adding cash, each drop takes a material amount of additional cash. Once you start talking about 1/2 cash then you're just talking about market timing during bad times and sitting in cash during good times