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.

Leveraged Anchor: A Two Month Review

Steady Options has now been tracking the Leveraged Anchor from the unlevered version for just over two months.  The results so far have substantially beat expectations, though there is a possibility for improvements discussed at the end of this piece. 

For those who may not be familiar, the original Anchor strategy invested approximately ninety percent of its holding in broad market S&P 500 ETFs and hedged 100% of that value using long dated put options (typically a year out) with the other ten percent of the funds (depending on market conditions, a full year at the money hedge can range from 5% to 12% of the value of the portfolio).  Over time, we would attempt to pay for this hedge using a short put selling strategy. 

Over the years, a few shortcomings in Anchor were identified.  First and foremost was the certainty that it would always lag the S&P 500.  Since only 90% of the investment is in S&P 500 ETFs, at the very best, Anchor would lag 10% behind.  Also, in bull markets where the long hedge had to be frequently rolled, the cost of hedging could become prohibitive.

To combat these issues, Leveraged Anchor was developed.  Instead of owning actual ETFs, deep in the money calls are purchased.  Depending on their risk tolerances, this allows investors to end up owning the equivalent of 125%-200% of just long, without using all of their investment capital.  (Options allow for leverage).  Extra funds can be invested in secure assets, such as BIL, which currently yield around 2.25%.  The second change implemented was no longer buying an at-the-money hedge, instead buying approximately five percent down.  This means the portfolio can suffer a five percent loss that the older Anchor would not have, but given that it makes the cost of the hedge significantly less, we felt as if the slight increase in loss was more than increased by the savings in the hedge.  This has largely eliminated the drag on the portfolio from the cost of hedging.

Prior to implementing the changes to Leveraged Anchor, a decade long back-test was conducted followed by six months of paper trading.  Two months in, having gone to live trading, these changes have been performing exactly as anticipated.  In that two month period, despite having to roll the long hedge up once (and thereby incurring a new cost very quickly into the year), Leveraged Anchor has outperformed the S&P 500, while maintain its hedge.  We would have been content, given the fast roll, to be lagging slightly at this point, but that has not occurred.  So far (and it’s a very short so far period), actual performance has exceeded expectations.

However, we are always striving to improve the strategy.  When analyzing the current trade setup, the biggest potential risk comes from the short positions.  Short positions, when rolled, are typically rolled one to two strikes (around a 55 delta) in the money.  This means, if the market falls, these short puts will lose value quickly, thereby harming the portfolio.  The risk of loss on the short puts is limited, because they also are hedged. 

In traditional Anchor, the short puts were hedged at the money, just as the underlying ETFs were.  When switching to Leveraged Anchor, we also moved the hedge on the short puts to 5% out of the money.

Practicality, this means as the market goes up, our risk from the short puts increases.  Here’s a simple example:

  1. Assume SPY is trading at $100;
  2. Assume we need 5 puts to hedge our portfolio.  We buy 5% out of the money and buy our long puts at $95;
  3. Assume we need to buy an additional 2 long puts to hedge the short selling we’ll be doing.  We buy those at $95;
  4. The market increases to $105. We are now selling puts at $107 (two strikes in the money);
  5. If the market falls back to $95, those short puts lose $17 each – a significant loss; and
  6. Our long puts actually would have LOST value over this time due to time decay.

In other words, we are at the exact same starting price of the S&P 500, but we’ve lost money (not $17, because we would have made some money selling puts as the market rose, but we still would have lost).  Whereas, any investor that had just owned SPY would be flat.

If possible, we’d like to avoid this situation as much as possible. 

In initial testing, it’s beginning to look like having a 5% out of the money hedge for the long portion (which is the most expensive part) and an at the money hedge for the short puts, may be more advantageous.  Similarly, we roll the long hedge after the market has moved up around 7.5% and always by 10%.  It may be prudent to roll up the hedge on the short puts more frequently – at closer to the 5% mark.  This would reduce losses on short term, and smaller amount, downward market fluctuations, without significantly increasing the cost of the portfolio.

The disadvantages to such a move are (a) it does increase cost, which will hurt performance, and (b) it increases the trades complexity through the number of moving parts and adjustments which occur.  However, if we can reduce risk further while still tracking the S&P 500 in up markets, we still meet our overall objectives.

I would like to invite our members to comment and question on these possible small changes.  Many of our improvements to the strategy have come through investor critiques and suggestions.  Feel free to ask questions and to share your thoughts. 

Christopher B. Welsh is a SteadyOptions contributor. He is a licensed investment advisor in the State of Texas and is the president of a small investment firm, Lorintine Capital, LP which is a general partner of two separate private funds. He offers investment advice to his clients, both in the law practice and outside of it. Chris is an active litigator and assists his clients with all aspects of their business, from start-up through closing. Chris is managing the Anchor Trades portfolio.         

Edited by Kim

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


  • Stock Selection for Options Trading

    Which stocks do you pick for options trading? In fact, does the underlying really matter? Many options traders ignore or overlook the critical importance of deciding which underlying to use for options trading. Focus often is on the richness of option premium as the sole factor determining which stocks to use for options trading.

    By Michael C. Thomsett,

  • The Importance of Time Horizon When Investing

    According to Investopedia: Investment horizon is the term used to describe the total length of time that an investor expects to hold a security or a portfolio.The following set of charts are a great visual aid to help investors plan and set expectations for investing in the stock market.

    By Jesse,

  • The Tradeoffs Of Strike Selection

    Many options traders choose to write short puts as a way to take advantage moderate-to-high implied volatility and neutral-to-bullish price movement. This setup is a basic type that can be used by options traders at any level, requiring very little experience to manage.

    By Drew Hilleshiem,

  • Inflation-Proofing Your Equities Portfolio

    All investors need to be wary of inflation. After all, it poses a risk to your portfolio, and it can adversely affect your bottom line. To be fair, inflation isn’t necessarily bad all the time. As the MoneySense article ‘How to Inflation-Proof Your Portfolio’ notes, inflation can be a positive, especially given today’s economic climate.

    By Kim,

  • History is a Great Teacher

    “The only thing new in the world is the history you don’t know.” -Winston Churchill. 

    “It is critical to understand human nature if you want to succeed at investing. Basing their decisions on short-term results is in fact the biggest mistake investors make.” - Jim O’Shaughnessy

    By Jesse,

  • Leveraged Anchor: A Two Month Review

    Steady Options has now been tracking the Leveraged Anchor from the unlevered version for just over two months.  The results so far have substantially beat expectations, though there is a possibility for improvements discussed at the end of this piece. 

    By cwelsh,

  • Options and Diversification Myths

    Options traders often overlook the nature and role of diversification. In picking one strategy over another, and in deciding which companies to use for options trading, diversification should be one of the attributes worth study. Why do options traders need to think about diversification?

    By Michael C. Thomsett,

  • SteadyOptions Managed Accounts

    One of the most common questions Steady Options receives relates to managed accounts. Lorintine Capital is offering managed accounts for both Anchor Trades and Steady Momentum. This post will detail the current Steady Options managed account offerings and how they work.

    By cwelsh,

  • IVolatility Tools: Probability Calculator

    The S&P 500 Index advance continues from its December 26th low at 2346.58, but it’s yet to exceed the December 3rd high at 2800.18.  Will it continue?  Will it crash? Will the bulls get their way? Find out in our short market review, followed by strategy suggestions, created using our Probability Calculator, currently available to all Steady Options subscribers.

    By Levi Ioffe,

  • SteadyOptions Strategies Analysis

    SteadyOptions trades a variety of option strategies – straddles, hedged straddles, calendars, butterflies and iron condors, volatility trades, etc..  Frequently these trades are designed to work together and complement each other, so for the last several years Steady Options has only analyzed total performance.

    By cwelsh,


  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