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.

Can you "Time" the Steady Momentum PutWrite Strategy?


As a financial advisor, investment advisor, hedge fund manager, model developer, and newsletter signal provider for over a decade now, I've had the opportunity to see quite a bit of human nature in action.

Often times I can have a conversation with the average investor about markets/trading and know what they're going to say because the same questions and comments come up time after time. We're just wired to think short term and worry about the apocalypse du jour that's likely to make the market crash soon.  Rarely do I hear "Jesse, what do you think is the right lifetime investment strategy to reach my long-term financial goals."

 

Something I've observed about option writing, is that at some point, since it's a strategy that requires you to act every month, you're going to deviate from the model because your emotions trick you into thinking you know better. The apocalypse du jour will take your mind captive, so just be aware of it. You're probably still going to eventually give in and do it even after reading this, because good advice is like Vitamin C that the body can't naturally retain on its own. It must constantly be injected!

You'll say "the market is at all time-highs, it can't possibly go higher!?" The next roll will come along, and you'll decide to sit it out for a month. In fact, almost every time it's time to roll, this thought will cross your mind. And if you act on this impulse history tells us there's a roughly 80% chance you'll miss a winning trade and the market will be even higher...or flat or not down much, all situations that lead to winning short put trades (one of the many attractive qualities of the strategy). So the next roll will come around, and now you're really stuck. You thought it was too high last month, and now it's even higher!

 

Stop and think about this for a second...go look up what the S&P 500 was at the day you were born. Since you're probably not going to do it, let me share some data.

 

Today: SPX $2,975

12/31/99: $1,469

12/31/89: $353

12/31/79: $108

12/31/69: $92

12/31/59: $60

 

Note this is just the S&P 500 cash index, which excludes dividends. Dividend adjusted, which all shareholders obviously get paid, the results are much more dramatic. By definition this means it was at "nose-bleed all time high levels" year after year after year, with the occasional multi year periods of temporary decline before it resumed the permanent uptrend. How else does something average 10% per year for a century other than routinely putting in new all-time highs? 

 

So can you outguess the market? Anything is possible, but it's more probable that 10 years from now you'll look back and realize you'd have made a lot more money if you'd have just followed the dumb model. Just like most of us would if we look back at our investing career up to this point and realize we'd be better off today if we had kept it simple and bought and held a reasonable portfolio of equity ETF's or mutual funds or just sold a simple put each month. The markets are ready to endow us all with forever increasing wealth if we would just get out of our own way and allow it to happen. 

 

I believe a model is the ceiling on potential performance, not the floor. Any human intervention is likely going to cost us money over the long term. Our time is better spent in the strategy construction process than trying to outguess it during the heat of battle when emotions tend to give us tunnel vision. I believe in evidence based investing, so we can also look and try to learn lessons from the data. For example, Dimensional Fund Advisors regularly updates research about mutual funds. Here's what their most recently updated "2019 mutual fund landscape" study found. 

 

1065963225_surviversandoutperformers.png.63d9a63ef2ba89edb2d134c6e74d0950.png

 

So for example, 20 years ago, there were 2,414 stock mutual funds at the beginning of the period. By 12/31/2018, only 42% even still existed. Do funds shut down because their performance was great or because it was poor?  And of those that survived, only 23% outperformed their prospectus benchmark. This includes the most talented market timers and stock pickers in the world, and only 23 out of 100 could add value, net of all costs, above a basic benchmark that is available today at almost no cost (and even no expense ratio in some situations). Note that this degree of outperformance is less than would be expected by random chance alone, so attempting to just find and invest with those few winners has not been a good approach either as the data shows there is a significant degree of randomness (aka luck) in performance data. And good luck is not something that is expected to persist in the future. 

 

So what can we learn from this? If 77% of professionals can't time the market, do you really think you're going to be able to do it consistently enough over time to add value vs. just relaxing and following the simple model (meaning, the trade alerts)? When you get the urge to deviate off course, try laying down until that urge goes away. And if it's still there when you get up, ask yourself what you know that the rest of the market doesn't? A foundation of an efficient market is that all know relevant information is already reflected in the price, which is obvious in the above mutual fund data that highlights how hard it is to outguess it. 

 

A better approach is to just be prepared for the inevitable periods of outstanding performance (like we've seen since launch), along with the inevitable periods of poor performance and even double digit declines in your account value. For example, don't put your emergency fund in the strategy. Don't take out a HELOC to invest more in the strategy. Just be patient and sensible. Surprise is the mother of panic, and if you're surprised in the future when we have a double digit portfolio drawdown (because we will), it means you haven't reviewed the charts in our strategy description post or read my posts like this that attempt to remind subscribers what to expect.

The market makes us money (geek speak, a combination of the equity, volatility, and term risk premiums), not my perfectly timed trade alerts. This also means the market will at times cause us to lose money, and my trade alerts will not prevent that from happening. We will accept what the markets give us, knowing that we get paid to bear risk that others don't want to take over the long term. For example, option buyers are typically hedging their position, and are willing to pay a premium to do that. We step in, and sensibly collect that premium, like an insurance company.  So only take the risk that you have the ability (time horizon), willingness (emotional tolerance for volatility), and need (long term required rate of return to reach your goals) to take.

 

dalio.png.f0b9beaca6bc17739c10f8a8eee67286.png

 

Above screenshot from Ben Carlson's excellent post that has related thinking: The Problem With Intuitive Investing


Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

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

  • Is This Rally for Real?

    After being down over 35% from the all time high, S&P 500 has rallied over 20% from the recent lows in just two weeks. Is this rally for real? Or is it just a bear market rally, a "dead cat bounce"? What the "experts" are saying? Has the market bottomed? Will the selling resume?

    By Kim,

    • 0 comments
    • 143 views
  • Financial Planning Lessons From the Pandemic

    The first quarter of this year will end up being one of the most volatile quarters of our investing lives. Many lessons can be learned. Perhaps none are more important than the basic principle of maintaining sufficient cash liquidity in the form of an “emergency fund” during both our working and retirement years.

    By Jesse,

    • 0 comments
    • 94 views
  • Human Nature and Option Risk

    Traders may tend to think of risk in purely mathematical terms. It can be quantified by analysis and by a deep understanding of probability. But there is more to this than just the math, and for options traders, some of the intangible considerations might have more impact on trading decisions than the formulas.

    By Michael C. Thomsett,

    • 0 comments
    • 167 views
  • Anchor Analysis and Options

    Anyone who has been trading the Anchor Strategy over the past few months should be extremely happy with its performance.  Now that many have realized how well it performs in down markets, one of the most common questions is “what should I do now?”

    By cwelsh,

    • 0 comments
    • 92 views
  • Discount Stock Shopping In High Volatility Markets

    The COVID-19 pandemic has rocked markets over the past month. The fear of the virus, the fear of the impact on global economics from the mitigation taken on by governments, and, finally, the fear of "what’s next" has propelled the VIX.

    By Drew Hilleshiem,

    • 0 comments
    • 391 views
  • The Fallacy of Market Timing

    The headlines say it all. "The worst day since the financial crisis". "Markets in turmoil". And today was "Stock markets post best day in years as governments fight coronavirus with cash". Could anyone predict the crash? And can anyone tell us where we are headed next week/month/year? Is it possible to call the tops and the bottoms?

    By Kim,

    • 0 comments
    • 322 views
  • Long Option Risks

    Among all options, the most easily calculated payoffs are those for long options. But there remains a great misunderstanding, even among experienced option traders. This must be clarified before moving forward. The misunderstanding is often seen expressed online and in the literature: “75% of long options expire worthless.”

    By Michael C. Thomsett,

    • 0 comments
    • 369 views
  • Option Payoff Probability

    Many options analyses focus on profit, loss and breakeven. These show what occurs on expiration day, assuming the option remains open to that point. But this is not realistic. Most options are closed or exercised before expiration, is calculation of how probable a payoff is going to be, how likely the loss, or the exact neutral outcome (breakeven), are all unrealistic.

    By Michael C. Thomsett,

    • 0 comments
    • 469 views
  • Value of Trend Following During Periods of Market Volatility

    Our trend following system looks at two things when planning a position. The first piece is obviously the direction of the trend.  Does the system signal up or down?  The second piece of a position plan is how much risk we are going to take. 

    By RapperT,

    • 1 comment
    • 1,048 views
  • Intrinsic vs. Extrinsic Value

    A lot is written about intrinsic value, but how does it work and what does it mean? The fact is, intrinsic value is an estimate of how future premium levels will change. It is base don current volatility and a set of assumptions. In dividing premium into its component parts, most descriptions deal with intrinsic and time value.

    By Michael C. Thomsett,

    • 0 comments
    • 521 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs Expertido