This is a bad idea. If you can find a commodity that has both a normal and inverse levered ETF, you can short both to capture tracking error without exposing yourself to net leverage. But it is still a bad idea as shares to borrow get scarce during price shocks. You can either get stepped out at the wrong time or will pay "high" borrow fees.
Where I have found great success is shorting UVXY (double levered ^VIX tracking) with OPTIONS. I can't get stepped out of the trade and there are no borrow fees. This is a peculiar security that is designed such that it declines over 80% a year. You can't buy/short the ^VIX directly so they create a synthetic commodity by buying the 14 and 40 day futures and rolling them daily. The normal state of affairs in such a scenario is known as "contango". That is the 40 day future is more expensive than the 14 day future due to the extra time value. So, most days, they sell a 'cheap' security and use the proceeds to buy an 'expensive' one. Plus it is double levered.
I report all buys and sells of this on my blog. I've made as much as 500% annualized and as low as 16% annualized. I have never lost money. Don't get too large of a position size though. ^VIX can sometime spike leading to a doubling in the price of UVXY over periods as short as a month. You don't want a margin call.
^^^ This
I'm not using options but I do have a small VXX short position that I keep adding to over the years (on VXX spikes). I will also take larger short positions in VXX for trend following trades. Those trades will be stopped out if it goes against me enough, so I couldn't lose a bunch unless I had a position on and we had another '87 style crash.
The VIX ETP's are by far the best instrument to bet against because they have the most contango. Other commodity ETP's that have high storage costs typically have a good amount of contango as well, but nothing like VIX.
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As far as the OP goes, yes the tracking error of the daily rebalanced 3x ETF's for the S&P 500 can be pretty good over time, but the contango in VIX products is far better. There is no contango in the S&P 500.
To see it in action, take a look at the VIX futures curve here
http://www.tradingvolatility.net/p/datasourceurldocs.htmlNotice that the June contract price is $12.20. The July contract price is $13.15. That's a difference of 7%. I'm simplifying it but all things being equal, in July the price is going to drop from $13.15 to $12.20, and the VXX etf will drop 7% as well. It's like this a lot of the time. You add up 12 months of this and you see why VXX drops an average of 50%+ each year since 2009.
Some will say you can only make 100% on a short position, but they leave out that you can add to your short position. So if you short $100k of VXX and it drops in a year to $50k, you just add another $50k to your short. The next year it drops again and you keep adding. Now you're compounding those profits into something truly amazing.
Obviously you gotta watch your risk and make sure you never get a margin call. It's why I keep my VXX shorts no bigger than 10% of my trading account. I never know when VXX is going to spike 200%, 500%, or even 1,000%.
I've had no problems finding VXX shares to short from Interactive Brokers. Can't say the same with other brokers. Maybe if I had $100 million I might have issues.