Leveraged Anchor is Boosting Performance

Could you do this in an ETF to mitigate taxes?  

If we get enough interest yes, but starting an ETF is a huge capital undertaking that you need institutional help/funding for.  We also need a longer proven track record, but it definitely is a possibility that we've considered.

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But what if we instead bought calls and constructed the portfolio as follows:

 

            Long 8 June 21, 2019 265 Puts          $16/contract                ($12,800)

            Short 3 May 25, 2018 286.5 Puts       $3.34/contract             $1,002

            Long 4 June 21 2019 150 Calls          $117.56/contract         ($47,024)

            Long 100 shares of SPY                     $266.92/share            ($26,692)

            Left over cash                                                                         $14,486

 

Looking at the possible scenarios in June 2019:

 

Sorry, I'm trying to figure this out out and most likely I'm missing something. Can you provide some clarity as to how is the constructed portfolio showing a balance of $100,963 when the spot at expiry is still 266.92? Mu calculations show the below. What am I missing?

You missed the comment in the next paragraph that "assumed we paid for the hedge from selling short each week."  So instead of the loss on the short puts, that's actually a gain of the $12,800.

The purpose of the example was just to show the difference in levered performance ignoring the short put position.  

Hi,

Good post, but i have some questions.

Let's say that once you enter in the position, the spy rises 10% in one month. Then you have to sell the puts atm like all the weeks or months. What about the long puts? Do you left them at the original price (10% otm in the present situation) or you roll them and buy again to have these long puts as close as the atm price? If you sell puts, which are 10% above your long puts, I guess that you could end the year with a bad performance, don't you?

I guess that the solution should be roll the long puts once the spy raises, said 7% more or less, in order to not loose the hedge. Am i correct?

Thank you very much for your answer.

Best regards from Spain.

Mikel

3 hours ago, Guest Mikel said:

Hi,

Good post, but i have some questions.

Let's say that once you enter in the position, the spy rises 10% in one month. Then you have to sell the puts atm like all the weeks or months. What about the long puts? Do you left them at the original price (10% otm in the present situation) or you roll them and buy again to have these long puts as close as the atm price? If you sell puts, which are 10% above your long puts, I guess that you could end the year with a bad performance, don't you?

I guess that the solution should be roll the long puts once the spy raises, said 7% more or less, in order to not loose the hedge. Am i correct?

Thank you very much for your answer.

Best regards from Spain.

Mikel

 

Mikel:  Thanks for the questions.

First, if you are a member, it may help to read the thread on when to roll the long hedge.  In essence though, we always roll the hedge by the time the market goes up 10% and begin to look at rolling around a 7% increase.  As you note, if we roll more frequently, the cost can get prohibitive (good news in rising markets, the cost of the hedge declines, so the roll normally is "cheaper" than the initial hedge we opened, not always, but most of the time).  But if we don't roll, then we become underprotected.  

Along with EdSeba, I'm having trouble understanding the example calculations. Assuming that you sell enough weekly/monthly puts to pay for the long put - see following calculations:
Anchor - 2 puts x 3.34 x 100 x 13 months = $8684 , which approximately covers the $9600 cost of the long put
Lev Anchor - 3 puts x 3.34 x 100 x 13 months = $13026 , which approximately covers the $12800 cost of the long put

In this case - we can just ignore the short puts and the long put for the positions. Assuming no change in the SPY in June 2019 the value of the positions would be:
Anchor:

   Long 340 shares of SPY[1]                 $266.92/share            $90,752.80
            Left over cash                                                                   $315.20
===========================================================
           Total                                                                                   $91067.80

Lev Anchor:
  Long 4 June 21 2019 150 Calls           400x(266.92-150)  =     $46,768.0                     
  Long 100 shares of SPY                     $266.92/share               $26,692.0
            Left over cash                                                                   $14,486
===========================================================
           Total                                                                                   $87,946

So I can't see how you arrive at your performance numbers. The only way I see to make up the difference is to sell more puts - but in your analysis you stated " Now the above analysis assumes that the hedge is exactly fully paid for and that all other variables have remained the same.  This assumption means we would have collected exactly $0.80.week each week – and we know that is impossible – but it still a useful analysis. " - so I don't see how to reconcile the performance numbers.

I'm not a member, so I don't have access to your other materials.  Can you clarify how you arrived at the theoretical performance numbers, since I also can't reconcile the numbers for other SPY values at the June 2019 expiry date?

I've looked at the numbers and see where my mistake was. In the Lev Anchor, after you enter the position you have $14,486 in cash, you earn $12800 from the short puts, plus the value of the stock and long calls. This gives:

$14,486
$12,800
$46,768
$26,692
=======
$100746

Which pretty much coincides with your calculation.  I apologize for the confusion.

6 minutes ago, DavidK said:

I've looked at the numbers and see where my mistake was. In the Lev Anchor, after you enter the position you have $14,486 in cash, you earn $12800 from the short puts, plus the value of the stock and long calls. This gives:

$14,486
$12,800
$46,768
$26,692
=======
$100746

Which pretty much coincides with your calculation.  I apologize for the confusion.

No worries at all, please always question -- it certainly won't be the first time on here I've had a wrong math calculation, and Anchor wouldn't be where it is today without members asking me what the heck I thought I was doing.