SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Blending Anchor Strategy


Anchor and Leveraged Anchor investors frequently ask why the strategy only trades SPY and SPY options rather than individual stocks, other indexes or commodities. We avoid individual stocks because of tracking and divergence issues.

When Anchor originally started in 2012, it consisted of a basket of stocks that we selected using a variety of methods (a blend of CAPSLIM, momentum, PEG and dividend growth).  The strategy created a basket of stocks we felt would outperform the S&P500 over the coming year, then we hedged using SPY options.  The premises was that using our knowledge we could choose stocks that would either perform with or outperform the market index, and they would be hedged with and against a broad market decline using SPY put options allowing us to gain excess returns.  In 2012 and 2013, it worked like a charm.

 

Then came 2014, when our portfolio underperformed the market.  Anchor was heavily concentrated in dividend stocks that underperformed the market.  This led to an unacceptable condition – our hedge losing value faster than our stocks were gaining.  In other words, we were not properly hedged – which was the entire point of the strategy.  After a full year and a half of sub-par performance, Anchor abandoned the stock picking portion of the strategy and went to straight index investing.  After adding the leveraged version (see other articles on this topic), Anchor fixed the lag problem in up markets, leading to the current iteration of the strategy, which to date has quite pleased us.

 

However, as many Anchor followers have noted – why not be more diversified? A blend of investments typically performs better, has lower risk and has a much smoother growth curve over time. In the perfect world, Anchor would use a blend of indexes.  Most Anchor users though do not have the capital to implement such a strategy.  To use Anchor, an investor needs at least $50,000 in starting capital.  This means the amount necessary to start goes up for a blended version.  In the ideal world, Anchor would consist of:

 

image.png
 

The cost of the hedge listed above is the cost for a full year, at the money, hedge, using a range of volatilities over the past few years as a percentage of the long position.  The spread is wider than listed above (e.g. there are times when it was possible to pay more than the above prices), but I would never recommend entering the strategy at those points.  Testing on the short put returns was done through ORATS, going back to 2012 (before that point, data becomes less reliable).  As can be seen from 2012 to the present on both SPY and IWM, the hedge would have been mostly paid off in any given year, while there would have been some lag in paying for the hedge on EEM and EFA – but this is to be expected given the degree of underperformance in international stocks when compared to US based indexes over that same time period.  The listed indexes were selected in a large part based on their option volume and liquidity should not be an issue for any of them.

 

How much money would it take to implement a blended Leveraged Anchor portfolio?  Given that you would need at least 5 contracts of each position to work the strategy with the short position, a 5% decline in the hedge point (as is done currently in Leveraged Anchor), the cheapest you could arrange would look like (using prices as of 9/23/2019):

 
image.png

           

The above is not “ideal” either since the 1/3 ratio in SPY and IWM will make paying for the hedge over the course of the year difficult.  That ratio works much better at the 2/5 level.  However, at that level, the cost of implementing the portfolio increases to about $310,000.

 

If I had over $300,000 that I wished to invest into the Leveraged Anchor strategy, I would diversify into other indexes and run the strategy for an extended period (over a decade).  Most of our followers don’t have that amount to commit to the strategy, in which case, simply using SPY works perfectly fine. 

 

Because we expect the strategy to perform better over extended time periods using a diversified basket of ETFs, we are looking into what it would take to launch a Leveraged Anchor, across indexes as a mutual fund, private fund or ETF.  If anyone has experience in that area and wishes to discuss it, please feel free to reach out.

                  

Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog.

Related articles

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Q&A with Mental Game Coach Jared Tendler

    QUESTION: Thank you for taking the time to participate in a Q & A session with Steady Option. Let’s start with an introduction and a little bit of background on who you are and how you got here.

    By Jared Tendler,

    • 0 comments
    • 145 views
  • Using TLT Options to Increase Expected Returns of a Buy & Hold Portfolio

    TLT is the iShares 20+ Year Treasury Bond ETF that seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. Even though US Treasuries typically act as a diversifying asset class to mainstream equities, many investors with long time horizons may not be interested in holding TLT in their portfolio because it would lower expected returns.

    By Jesse,

    • 0 comments
    • 115 views
  • Tax Efficient Trading Part II: Capital Gains Deferral

    In part I I illustrated how the preferential tax treatment of 1256 contracts could improve after tax returns of a PutWrite strategy over a long period of time. In this article, I’ll continue the illustration by switching from a PutWrite to an ETF BuyWrite (covered calls) strategy while holding pre-tax expected returns constant at 8%.

    By Jesse,

    • 0 comments
    • 668 views
  • Tax Efficient Trading Part I: The 1256 Contracts

    Cash settled index options like SPX, XSP, RUT and a few others receive special federal tax treatment where 60% of the gains are reported as a Long Term Capital Gain (LTCG) even if the contract was held for less than a year.

    By Jesse,

    • 0 comments
    • 613 views
  • SPY Short Puts vs. Put Spreads

    In this article I’ll be using the ORATS Wheel backtesting tool to compare the performance since 2007 of SPY short puts versus short put spreads. I’ll look at both risk and returns, and different ways of determining position size to adjust for the differences in risk between the two trades.

    By Jesse,

    • 1 comment
    • 1,275 views
  • Signs that you Are Ready to Start Investing

    If you want to build your wealth, you have to make sure that you invest your money. If you put money into a savings account and don’t earn any interest from it, this won’t work for you in the long term. Your money will lose value because of inflation, and this is the last thing that you need. So when do you invest?

    By Kim,

    • 0 comments
    • 782 views
  • One Year of Diversified leveraged Anchor

    I almost hate to keep saying it, but the Diversified Leveraged Anchor strategy keeps exceeding expectations and performing as designed. To remind our readers, Diversified Leveraged Anchor was created in April 2020 attempting to further increase performance, reduce risk, and to reduce volatility. 

    By cwelsh,

    • 5 comments
    • 1,745 views
  • Should I Pay Off My Mortgage Early Or Invest?

    Paying off a home mortgage early is a popular financial goal. Most people feel a level financial peace when their home is paid off that is beneficial in many ways. The most common approach to paying off the mortgage early is directly making additional principal payments to the lender on a regular basis.

    By Jesse,

    • 0 comments
    • 808 views
  • Option Order Execution Tips

    As a community of option traders, we all can relate to the occasional challenges of order execution. Best practices for avoiding errors as well as techniques for better potential execution will be the focus of this article.  Like countless others in the Steady Options community, I personally have traded thousands of option contracts over the last decade.

    By Jesse,

    • 17 comments
    • 2,367 views
  • What Trading Can Offer To A Newcomer

    For any first-time investor, one of the most important questions to ask is “why are you doing this?”. Getting into investment can be thrilling and open up new worlds for you, but it can also be draining both physically and emotionally, with long days and sudden market moves always a genuine risk.

    By Kim,

    • 0 comments
    • 999 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido