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.

Enhancing 60/40 With a Short Strangle Overlay


The classic 60/40 stock/bond portfolio has stood the test of time in both hypothetical and live fund results from multiple fund sponsors such as Vanguard, Fidelity, and American Funds. 60/40 balances enough in equities (60%) to generate long-term growth with enough in high quality bonds (40%) to manage downside risk.

Many alternative portfolios have been devised to beat the 60/40 portfolio on a risk-adjusted basis, but few have succeeded over the long-term. The death of the 60/40 portfolio is often proclaimed by many in the industry, yet it’s often by those with competing products. In this article, I’ll present a simple idea for active option traders to enhance the 60/40 portfolio instead of compete against it.

 

Short Strangles

Short strangles are a multi-leg option strategy typically written around one month from expiration by combining an out of the money (OTM) put with an OTM call. This creates a profit zone at expiration where the goal is for the underlying asset to finish in between the strike prices so that the entire option premium collected is retained as profit. What’s unique about selling options is how no cash outlay is required, only a collateral requirement known as margin. This presents opportunities for creativity. With a 60/40 allocation as the underlying portfolio, the short puts can be collateralized by bonds and the short calls can be collateralized or “covered” by stocks.60/40 with a short strangle overlay effectively combines covered calls with cash secured puts.

 

Portfolio Example

A specific example could be using a fund like Vanguard’s balanced index fund (VBIAX) as the underlying 60/40 portfolio. This fund maintains a US based 60/40 asset allocation all in one low-cost fund with a track record of 8.6% annualized average return since 1992. An active trader could then enhance this base portfolio in an options approved margin account by writing SPX, XSP, or SPY strangles on top of a portion of the VBIAX position. If a trader targeted a 30% notional allocation for the strangles, the short calls would be fully covered by the underlying equities and the short puts would be fully collateralized by the underlying bonds. Short strangles have a historical risk profile that exhibits low beta to both stocks and bonds during most market conditions, which adds diversification to the portfolio. Although a strangle overlay increases total portfolio risk it’s likely to increase returns by a greater degree that should result in a higher expected Sharpe Ratio.

 

Stay Tuned

In a follow up article, I’ll present historical data that illustrates the concept in more detail. I personally find this portfolio compelling as it’s simple to manage and relatively tax efficient due to the buy and hold nature of the underlying 60/40 portfolio and the 1256 contract treatment of the option strangles when using a cash settled index like XSP. The portfolio blends together three distinct sources of returns in stocks, bonds, and option selling. It also blends passive investing with active trading in a well thought out manner. Like a good recipe, the ingredients taste the best when combined together.

 

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.

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

  • The Big Loss

    At his blog, Joey offers his perspective on the top reason that so many trader wannabes are not, and will not, become profitable traders. His post is titled: Learn to Lose Money to Make Money. Here are the Excerpts from the blog.

    By Mark Wolfinger,

    • 0 comments
    • 260 views
  • ETF Vs. Stock: Note Down the Vital Points

    Today’s small investment can fulfill your dream of high living tomorrow. But investing blindly can make it reverse. We all want to get a high return on our investment. Stocks or ETFs can be the best option for you in such cases. The investment in stocks or ETFs is not very different except few noticeable points.

    By Kim,

    • 0 comments
    • 292 views
  • Considering Trading? Here Are Some Trading Options You Need To Know

    Whether you are considering dabbling in day trading or looking for a longer-term investment if you want to start trading it will serve you well to carry out a little due diligence in advance. There are a number of markets that you could use and understanding how each one works and what they are all about is key.

    By Kim,

    • 0 comments
    • 5,873 views
  • Why Should You Paper Trade Options

    In my previous article I shared some thoughts why I believe traders should start with paper trading before committing real capital. Not everyone would agree, but today I would like to share another article by a trader I respect very much. The original article was published here

    By Kim,

    • 0 comments
    • 295 views
  • Is Long Call Better than Bull Credit Put Spread?

    The trigger to this article was a question posted on the forum: "why we should use bull credit put spread when you can just long call they both have limited loss both in long call you have unlimited profit why limited it with bull put spread?" You can read the discussion here.

    By Kim,

    • 0 comments
    • 446 views
  • Strike Selection: A 'Sweet Spot' for Option Sellers?

    The words above are powerful because they're approach-agnostic. It doesn't matter if you're an old-school pit trader who swigs grit instead of coffee before the opening bell, or a Gen Y technocrat who codes trend-detection algorithms. All traders live and die by The Four Words. If you consistently buy low and sell high, then you will be profitable.

    By Kim,

    • 0 comments
    • 1,558 views
  • Post-Earnings Implied Volatility Crush

    Earnings crush is the fall in implied volatility after earnings is announced. Typically, earnings announcements cause the price of the stock to move more than normal. The move will have more effect on short dated expirations since the day of earnings large move has more weight than the rest of the days with normal moves. 

    By ORATS_Matt,

    • 0 comments
    • 352 views
  • Why Not to Hold Strangles Through Earnings

    In my previous article, I described a strategy of buying strangles a few days before earnings and selling them just before earnings. In this article, I will show why it might be not a good idea to keep those strangles through earnings.

    By Kim,

    • 0 comments
    • 387 views
  • How to Prepare for Crypto Downturns

    Most cryptocurrency owners skipped a heartbeat when the bitcoin fell to 50% from its all-time high. According to experts, such nasty downturns are natural, and the crypto market may witness such downturns now and then.

    By Kim,

    • 0 comments
    • 520 views
  • Tradier Brokerage Special Offer

    Tradier Brokerage is partnering with SteadyOptions to offer a special promotion for SteadyOptions customers: Open an account with Tradier Brokerage and get no subscription fees for 3 months, plus all ACAT fees will be waived. After opening an account, you will also receive 3 months of free access to TradeHawk, our full-featured customizable trading platform.

    By Kim,

    • 0 comments
    • 662 views

  Report Article

We want to hear from you!




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