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

  • 7 Ways To Avoid Forex Scams

    Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams:

    By Kim,

    • 0 comments
    • 228 views
  • Historical Performance of Selling S&P 500 OTM Calls

    If you’re comfortable owning an S&P 500 index fund, you should also be comfortable with covered calls. For example, CBOE publishes data on a simple covered call strategy with their BXMD index. The description from CBOE is as follows:

    By Jesse,

    • 0 comments
    • 217 views
  • Are Trusts the Best Way to Leave Money to Your Heirs?

    First, this is a general comment. Every person’s situation is different. I could say “95% of people don’t need this,” and you could be in the 5% who do. So, don’t ever make personal investment or estate planning decisions based on an online post, contact an actual investment advisor or attorney - most will have initial conversations for free (I do).

    By cwelsh,

    • 0 comments
    • 165 views
  • Anchor and Steady Momentum update

    As our members know, we introduced a new strategy to our members few months ago - Steady Momentum. The goal is to produce higher risk-adjusted returns than the underlying indexes. We also introduced a new version of our Anchor Trades strategy. This post will provide an update on both strategies. 

    By Kim,

    • 0 comments
    • 238 views
  • GBP/USD: If Boris Johnson Becomes PM, Volatility will Rise

    UK PM May is set to step down and Boris Johnson is the leading candidate to replace her. The erratic former foreign secretary may increase GBP/USD volatility. Despite Johnson's Brexit credentials, he could surprise and be pound-positive.

    By Kim,

    • 0 comments
    • 331 views
  • How Steady Momentum Captures Multiple Risk Premiums

    Our Steady Momentum PutWrite strategy attempts to outperform the CBOE PUT index, which writes cash secured puts on the S&P 500. An investable version of this strategy can be purchased with the ETF PUTW. The historical data for PUT extends back more than 30 years, highlighting how writing puts can be an attractive strategy.

    By Jesse,

    • 0 comments
    • 256 views
  • What Options Traders Need to Know About Dividends

    Higher dividends are better, right? Yes, usually. But not always. Dividends are a fundamental indicator and many options traders are not interested in fundamentals. But as a means for picking stocks on which to trade options, some fundamentals offer great insight.

    By Michael C. Thomsett,

    • 0 comments
    • 378 views
  • BTC/USD Struggles To Maintain Newly Conquered Territory

    The first condition to declare the market is in bullish mode has been fulfilled. Now it is Ethereum's turn to assume its part of the game. XRP/USD keeps a low profile, waiting for its chance. We begin the week of analysis celebrating the bullish behavior of Bitcoin late on Sunday.

    By Kim,

    • 0 comments
    • 333 views
  • Fear of Options Assignment

    One of the most common fears in option trading is one of early assignment.  The fear of having a large number of shares (or a large short position) coupled with a potential margin call (or Reg-T call) causing a sudden shortage of cash in their accounts worries investors.  Investors commonly view assignment as a huge potential risk.

    By cwelsh,

    • 1 comment
    • 480 views
  • The Value of Equity Asset Class Diversification

    This investing lesson is a tale of two time periods that highlight the important role of equity asset class diversification and systematic rebalancing in an equity fund portfolio.  Human nature is a failed investor, when our natural instinct is often to do the exact opposite of what we should do in practice.

    By Jesse,

    • 0 comments
    • 413 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