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.

Put Permanent Portfolio


Harry Browne popularized the concept of the "Permanent Portfolio" decades ago by recommending an asset allocation of 25% stocks, 25% bonds, 25% gold, and 25% cash. In the 90's, the concept of "risk parity" also became popular with writings by Cliff Asness of AQR Capital.

Read more in Why Not 100% Equities and Bridgewater's "All Weather" Fund. Both are similar concepts attempting to create a more balanced portfolio that is better prepared to handle different economic environments by investing less in stocks and more in everything else. 

Options can be used in portfolios in many different ways, including to create leverage, which is one of the key tenets of risk parity. Active retail traders with margin accounts could fairly easily use the concepts in this article to create diversified portfolios with strong expected Sharpe Ratios by short selling puts on a small handful of ETF options in a sensible way (i.e. cash secured, or modestly levered in a disciplined and repeatable manner).

 

Let's first look at the Permanent Portfolio, from 1970-2017, represented by the S&P 500 for stocks (SPY when available), long term US treasuries for bonds (TLT when available), London gold price index for gold (GLD when available), and 1 month US T-bills for cash.  The portfolio is rebalanced annually. We are using the excellent website, Portfolio Visualizer (www.portfoliovisualizer.com), for our examples. 

 

Click on all images for greater clarity

Perm 70-17.png

Past performance doesn't guarantee future results

 

What is noticeable, and desirable, about the Permanent Portfolio asset allocation is the relatively steady long term historical performance with modest and relatively short lived drawdowns. It has been a stable performer due to the low correlations between stocks, bonds, and gold. But this also means the annual returns can vary substantially from stocks alone, which can be behaviorally challenging for some investors. Know thyself before making investment decisions.

 

By removing cash, portfolio visualizer will allow us to solve for risk parity of our three remaining asset classes. Since 1970, this would have been an allocation of approximately 42% treasury bonds, 33% stocks, and 25% gold. By eliminating cash in the portfolio, we would expect higher returns, but also modestly higher risk, which is in fact what would have happened.

 

Portfolio 1: Our original Permanent Portfolio asset allocation

Portfolio 2: Risk parity weighted allocation (holdings are balanced based on risk instead of dollars)

 

RPPP.png

Past performance doesn't guarantee future results

 

Using the ORATS "Wheel" backtester, we can backtest a Permanent Risk Parity Portfolio of 30 day short puts on SPY, GLD, and TLT since June 2008, while also adding the T-bill return to the portfolio since short puts simply require a good faith margin requirement by the broker instead of a cash outlay when holding the underlying ETF. 

 

Portfolio 1: Permanent Portfolio

Portfolio 2: Risk Parity Permanent Portfolio

Portfolio 3: Risk Parity Put Permanent Portfolio (cash secured, i.e., no leverage)

 

RPPPP.png

Estimated transaction costs of slippage and commissions are built into all ORATS Wheel backtests, therefore they have been accounted for in the put parity portfolio simulation, while portfolio 1 and 2 are gross of estimated transaction costs. None of the portfolios have accounted for the impact of taxes, which have differing impacts on investors. Consult with your tax advisor. Past performance doesn't guarantee future results.

 

Af first glance, it may appear that selling puts in place of holding the underlying ETF is unattractive. We'd argue that investors should think about portfolios in terms of both total returns and risk-adjusted returns, and the put parity portfolio produces the highest Sharpe Ratio. Since short puts can be levered to create a higher notional exposure in a margin approved brokerage account, investors seeking higher returns could apply a modest amount of leverage to create notional exposure around 150% to produce returns in line with the underlying ETF portfolio, while still maintaining the advantage of lower volatility.

Of course, investors could also lever an ETF portfolio by borrowing in their brokerage account, but typically at a much higher cost than the implied financing rate built into derivative contracts like options. Investors comfortable with the volatility of a 100% equity portfolio (15-20% annualized) could further lever positions to have the potential for equity like returns while still maintaining the attractive diversification characteristics of a Permanent Portfolio style asset allocation mix.

 

It should also be noted that if an investor prefers an option position that acts more like synthetic stock (ETF), an option "combo" or "risk reversal" position can be created by combining a short put and long call. All of these concepts can be tested with the ORATS wheel, which we encourage those interested to check out as it's a great tool for automated backtesting of many option strategies with around a decade of clean historical data on many equity option symbols. 

 

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™. 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. Jesse oversees the LC Diversified forum and contributes to the Steady Condors newsletter. 

 

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

  • How To Start: Options Basics

    Today might just have the smallest gap between Wall Street and Main Street we’ve ever experience.  We’ve come a long way when it comes to common retail traders access, affordability of trade commissions, options trading education, research and analysis services, and, finally, some progress in accessibility of technology for options traders.

    By Drew Hilleshiem,

    • 0 comments
    • 138 views
  • Investors Are Not As Smart As The Media Thinks

    Over the last decade there has been a substantial rise in proclamations such as “investment advisors are useless,” “manage your own assets,” “don’t pay for financial advice,” and other similar sentiments. 

    By cwelsh,

    • 0 comments
    • 126 views
  • Should You Close Short Options On Expiration Friday?

    Options traders spend a lot of time trying to figure out the perfect moment to open a trade; but little attention is devoted to the other side of the transaction. When should you close? This applies equally to long and short positions. However, one aspect of short timing concerns expiration Friday.

    By Michael C. Thomsett,

    • 0 comments
    • 345 views
  • 8 Strategies For High Volatility Markets

    Trading in high-vol environments requires a different approach from low-vol markets. Here are 8 strategies to improve your trading and help you to survive in high volatility markets. They are very different from strategies in low volatility environment.

    By TFCAB,

    • 0 comments
    • 179 views
  • Selling Options Premium: Myths Vs. Reality

    Selling Options Premium refers to certain set of strategies that involve net selling of options, as opposed to buying premium where you are net buyer of options. There are a lot of myths and misconceptions about Selling Options Premium. This article will explain the basic concepts and debunk some of the myths.

    By Kim,

    • 0 comments
    • 697 views
  • Combining Momentum and Put Selling (Updated)

    In February of 2017, I wrote an article about combining together the concepts of momentum and put selling. You can find that article here as prerequisite reading. With this post, we'll look at how the strategy presented has done since then, along with some additional implementation ideas.

    By Jesse,

    • 2 comments
    • 517 views
  • Options and Invisible Risks

    Entry and exit timing is crucial to successful options trading, without doubt. However, one form of risk not often acknowledged is the risk of taking too many actions, too soon, and for the wrong reasons.

    By Michael C. Thomsett,

    • 0 comments
    • 513 views
  • The Volatility Option Trade In Alibaba

    This is why you have a Trade Machine membership. We can ride the evergreen patterns, and we have, for years. But when the market shifts, we need a minimum amount of data to adjust, and succeed -- now we will. This is our time.

    By Ophir Gottlieb,

    • 0 comments
    • 768 views
  • James Cordier: Another Options Selling Firm Goes Bust

    On November 1, 2018, a money manager named James Cordier from OptionSellers.com published an article on Seeking Alpha named Option Selling Opportunities So Good They're Scary. To me, this title alone would be enough to completely discredit the author and not trust him with my hard earned money.

    By Kim,

    • 10 comments
    • 5,008 views
  • Do You Have a Written Investment Plan?

    Meb Faber recently polled his twitter followers, and found that only about 25% have a written investment plan. Your investment plan should be based on your willingness (risk tolerance) and need (required rate of return to meet your long term goals) to take risk. 

    By Jesse,

    • 0 comments
    • 550 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs