I’ve been looking at the Prop Firm model through a quantitative lens lately and wanted to get your take on a specific theory.
The idea is to view the entire process as a Double Barrier Option. You're essentially paying a premium via the entry fee for a convex payoff, with a Max Drawdown acting as the lower barrier and the Profit Target as the upper barrier.
I keep hearing this claim that because the risk-reward profile is so highly convex, you can actually "get away" with using retail strategies that would be EV negative in a normal live environment. The logic is that if you treat each challenge as a separate bet in an options portfolio, you just need to manage your bankroll to fund enough attempts until one hits.
I have a few questions for the quants in here:
First, how would you even begin to mathematically calculate the Pass Rate for a strategy that is fundamentally EV negative? Are we just talking about a Gambler’s Ruin or Monte Carlo simulation here?
Second, is there a way to actually identify a strategy that "fails slowly" enough to exploit this leverage among the usual retail noise, or is that a mathematical dead end?
Finally, does this strike you as a legitimate way to approach variance, or is it just more "Guru" marketing designed to hand-wave away the reality of ruin probability?
Looking forward to some technical insights.
