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

  • Types of Volatility

    Are most options traders aware of five different types of volatility? Probably not. Most only deal with two types, historical and implied. All five types deserve some explanation and study.

    By Michael C. Thomsett,

    • 0 comments
    • 157 views
  • The Performance Gap Between Large Growth and Small Value Stocks

    Academic research suggests there are differences in expected returns among stocks over the long-term.  Small companies with low fundamental valuations (Small Cap Value) have higher expected returns than big companies with high valuations (Large Cap Growth).

    By Jesse,

    • 0 comments
    • 393 views
  • How New Traders Can Use Trade Psychology To Succeed

    People have been trying to figure out just what makes humans tick for hundreds of years.  In some respects, we’ve come a long way, in others, we’ve barely scratched the surface. Like it or not, many industries take advantage of this knowledge to influence our behaviour and buying patterns.

    By Kim,

    • 0 comments
    • 257 views
  • A Reliable Reversal Signal

    Options traders struggle constantly with the quest for reliable reversal signals. Finding these lets you time your entry and exit expertly, if you only know how to interpret the signs and pay attention to the trendlines. One such signal is a combination of modified Bollinger Bands and a crossover signal.

    By Michael C. Thomsett,

    • 0 comments
    • 478 views
  • Premium at Risk

    Should options traders consider “premium at risk” when entering strategies? Most traders focus on calculated maximum profit or loss and breakeven price levels. But inefficiencies in option behavior, especially when close to expiration, make these basic calculations limited in value, and at times misleading.

    By Michael C. Thomsett,

    • 0 comments
    • 406 views
  • Diversified Leveraged Anchor Performance

    In our continued efforts to improve the Anchor strategy, in April of this year we began tracking a Diversified Leveraged Anchor strategy, under the theory that, over time, a diversified portfolio performs better than an undiversified portfolio in numerous metrics.  Not only does overall performance tend to increase, but volatility and drawdowns tend to decrease:

    By cwelsh,

    • 1 comment
    • 587 views
  • The Best Chart I’ve Seen in 2020

    The best visual aids for learning are often very simple. The chart in this article was created by Paul Merriman, using data from Dimensional Fund Advisors. I primarily use Dimensional Funds in building portfolios for my clients. There are many takeaways from this chart, and I’d like to share a few thoughts that stick out most to me.

    By Jesse,

    • 0 comments
    • 601 views
  • Traditional or Roth Retirement Account?

    When US investors save for retirement, there are many important decisions that have to be made including which investments to use as well as which type of accounts to fund. Tax favored retirement accounts such as 401(k)’s and IRA’s should be utilized to the maximum extent possible because of the opportunity for tax advantaged growth.

    By Jesse,

    • 0 comments
    • 508 views
  • My Favorite Investing Books, Blogs, Papers, and Podcasts

    There are so many excellent sources of investment education available today that I thought a short post about some of my personal favorites could be beneficial. Below are different forms of content that have been particularly impactful to my investment philosophy, and they are not in any specific order.

    By Jesse,

    • 0 comments
    • 965 views
  • Go For Gold! The Business Behind The Dazzle

    The price of gold is often in the news—sometimes it's rising, and other times it's dropping but for the most part, it has been on a steady increase for many years. It is certainly worth more now than it did twenty years ago. When its price is on the rise, we may have thought about the benefits of selling our gold for profit and making some passive income from it.

    By Kim,

    • 0 comments
    • 546 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