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.

Defining the Anchor Strategy


Lorintine Capital and Steady Options have been trading the Anchor strategy for a number of years. During this time Anchor has evolved as we have learned more, in no short part due to the Steady Option’s members continuing questioning of the strategy, insights they provide, and a large group of individuals seeking to improve the strategy’s efficiency. 

First it is important to understand what is the goal of the Anchor trades: it is to prevent loss of capital while still generating a positive return in all market conditions. It is NOT to outperform the market. 

One of the most important parts of evaluating a strategy is to appropriately set target returns and develop a good benchmark to measure relative performance.  Without a known target, measuring performance internally is difficult.  Without an appropriate benchmark, measuring against the competition is impossible.  In order to do this, we need to break the Anchor strategy down into its key components for evaluation.  Anchor is comprised of:

 

  1. A long ETF position that is typically 88%-92% of the total investment;
  2. A long put position that is typically 7%-10% of the investment for the hedge; and
  3. A short put position that makes up the balance to attempt to pay for the hedge.

 

When Anchor was originally devised our goal was to slightly lag the markets in up years, stay level in flat market returns, and beat the market significantly in down years.  That worked in years the market was up ten percent or less, which was the primary evaluation period.  However, the past several years of bull markets have demonstrated that the term “slight lag” is not realistic or appropriate in large up markets. 

 

Given the fact that Anchor is only approximately 90% long at any given time, we automatically are behind bull market performance.  For example, if the market goes up 20%, Anchor’s long ETF positions may only go up around 18%.  Couple that with the fact that in significant up trending markets, the long hedge rolls multiple times per year and you end up with larger lags in rising markets – which get more pronounced the faster the market is rising.  A more effective measurement would be to compare Anchor to a portfolio with comparable risk, such as a 60/40 stock/bond portfolio.  However, even that is not an ideal metric, as Anchor's option hedge can significantly outperform it in bear markets, making comparisons difficult.

 

Swan Global Investment’s Defined Risk Strategy is quite similar to Anchor.  Swan does a nice job of setting expectations on their website with a  “Target Return Band” shown below:

Target-Return-Band-Overview-Swan-Blog-1.png

The theory being that their Defined Risk Strategy should fall within or above the blue range.  The red line represents the theoretical return of the S&P 500, the yellow line is the Swan’s Defined Risk Return target returns when contrasted with the S&P 500 return at the point.

 

It is our opinion that these target bands represent an adequate projection of what results should be expected internally of the Anchor strategy as well.  We will of course always work to exceed those expectations, but this will represent more realistic return projections for Anchor, particularly in large bull scenarios.

 

Another advantage to evaluating Swan’s Defined Risk Strategy, is it now gives us an appropriate benchmark to measure against.  In describing their product, Swan states:

 

Investing to help minimize downside risk. The market is unpredictable, making it difficult to time the markets or consistently pick outperforming stocks. That’s why we believe reducing downside risk can significantly impact wealth creation.”

 

The goal: to achieve positive returns while minimizing the downside risk of the equities markets.”

 

Key strategy elements to each of the Defined Risk Funds include:

 

  • No reliance on market timing or stock selection
  • Designed to seek consistent returns
  • Aims to protect client assets during market downturns
  • Always hedged, all the time, using put options”

 

“Repeatable Four Step Investment Process

 

Step 1: Establish Equities (using diverse ETFs)

 

Step 2: Create the Hedge – Always hedged – We use only longer term puts, which offer the greatest cost-efficiency and stability, and then maintain that protection by rolling the hedge at least annually.  As such, the DRS (Swan’s Defined Risk Strategy) is not under duress to seek protection in market downturns.

 

Step 3: Seek to Generate Market-Neutral Cash Flow – We use options-trading expertise to provide our clients with the potential for return, regardless of market conditions.

 

Step 4: Monitor and Adjust”

 

To anyone who has used Anchor, this should all sound familiar.  Since Swan’s impressive track record is significantly longer (going back to 1997 in different forms) than Anchor it provides proof of concept.  Swan’s Class I mutual fund shares have returned the following (courtesy Morningstar) since 2013:

 

image.png

 

Vs Anchor:


 image.png

Disclosure: Anchor's returns have not been audited by any independent third party, do not guarantee future results, and do not reflect the deduction of applicable management and/or subscription fees.  Anchor’s 2013 returns were dramatically increased by the use of individual stocks which outperformed the market, as opposed to the broad market ETFs that are now used within the strategy to reduce tracking error. 

 

The following table compares Anchor returns with S&P 500 total return, expected return (as defined by Target Return Band) and Swan returns. Anchor outperformed the Swan every single year except 2014.



image.png

While some investors may be frustrated that Anchor lagged the bull market in 2016 and 2017, we believe that is not so much a design flaw in Anchor, as a flaw we made in setting proper expectations. 

Conclusion:

 

The Anchor objective is to produce equity like returns over a full market cycle, with reduced volatility and bear market drawdowns. Investors should expect a trade-off of reduced upside capture during extreme bull market gains. Given our belief that the long term is the only investment time frame that truly matters, we believe the strategy provides attractive mathematical and psychological benefits to investors seeking the long term growth potential of the US stock market.

 

If you have any questions about the Anchor Strategy, how to implement it on your own, or wish to have us manage the strategy for you, contact my firm at anytime or make a post on the SteadyOptions website:

 

Lorintine Capital

Christopher Welsh: cwelsh@lorintine.com

Jesse Blom: jblom@lorintine.com

P: 214-800-5164

F: 214-800-5165

 

 

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

  • How to Trade Cryptocurrency: A Guide for Beginners

    Trading is a core economic concept that includes the purchase and sale of assets, be it products or services, where the buyer compensates the price to the seller. In other circumstances, trading partners may want to exchange goods and other services.

    By Kim,

    • 0 comments
    • 214 views
  • The Lessons in Business We Can Apply to Investing

    While running a business and investing are two very different things, there are a number of parallels that apply to both. If you are looking to start trading and you are running a business, or vice-versa, there are some lessons that you can carry from one to the other.

    By Kim,

    • 0 comments
    • 449 views
  • 3 Methods To Invest as a Self-Employed

    As we all think about investing as a way to keep ourselves financially afloat, there is one group of people that the whole idea of trading and investing may seem more of a risk than normal. Self-employed people, who have to run their own business, trade as themselves, and essentially live a feast or famine lifestyle, could find themselves looking to invest or start trading but fall at the first hurdle because they do not have enough money or they are not able to put up with the risk. 

    By Kim,

    • 0 comments
    • 454 views
  • Steady PutWrite 2021 Year In Review

    Steady PutWrite (SPW) launched in early 2019, so we now have close to three years of performance to evaluate on both an absolute basis and relative to the strategy’s benchmark, PUTW (WisdomTree CBOE S&P 500 PutWrite Strategy Fund). 

    By Jesse,

    • 0 comments
    • 483 views
  • SteadyOptions 2021 Year In Review

    2021 marks our 10th year as a public trading service. It was our best year since inception. We closed 192 winners out of 270 trades (71.1% winning ratio). Our model portfolio produced 201.0% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month in 2021. 

    By Kim,

    • 0 comments
    • 1,219 views
  • Results of Trading Industry Survey

    Earlier today I distributed a press release with the results from the Trading Industry Survey we conducted in November. First off, I want to thank all of you who took the time to complete the survey. I greatly appreciate your participation and, as you’ll soon see, the results were intriguing.

    By Jared Tendler,

    • 0 comments
    • 1,470 views
  • Questions to Ask Yourself Before You Start Investing

    Everyone has heard the success stories of people making tons of money from investments, retiring early, and living a life of luxury. But, before you start tying up all your cash in investments, it is crucial to understand more about what is involved.

    By Kim,

    • 0 comments
    • 1,613 views
  • How To Use Tech To Improve Your Stock Trading

    Technology is undoubtedly helpful in many aspects, and stock trading is no exception. Over the years, the stock trading market has experienced improvements as a result of leveraging technology. For instance, stock traders can have faster access to more comprehensive data to help them make a more informed decision.

    By Kim,

    • 0 comments
    • 1,688 views
  • Exploiting Earnings Associated Rising Volatility

    It was brought to my attention that Seeking Alpha now restricts the number of articles people can read for free, so I will reprint few of the key articles I wrote for SA. This one was my fist article, written in 2011, and it gives an introduction of the earnings straddle strategy that we have been using for the last 10 years with great success.

    By Kim,

    • 0 comments
    • 1,962 views
  • Why And How To Trade Objectively And Keep Your Emotions In Check

    Trading on the stock market is a serious profession. Individuals can make a very lucrative return whether trading professionally or personally. To successfully trade on the stock market it requires years of dedication, practice and thorough market understanding.

    By Kim,

    • 0 comments
    • 2,352 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