Steady PutWrite 2021 Year In Review

As a reminder, Steady PutWrite is available as a standalone subscription or as part of the Lorintine bundle of 3 services.

SPW is based on a $100,000 model portfolio that sells near the money puts on XSP, IWM, EFA, and EEM.  The strategy uses modest accounting leverage, targeting 125% notional exposure. The strategy also increases expected returns by holding collateral assets in intermediate term bond ETF’s instead of broker cash or T-bills as is common for most putwrite strategies.

The SPW model portfolio returned 14.2% in 2021, underperforming the PUTW benchmark return of 20.9%. This is explained by the differences in underlying assets of SPW vs. PUTW.

2021 Underlying Asset Returns:

• SPY: 28.74%
• IWM: 14.54%
• EFA: 11.46%   
• EEM: -3.61%
• IEI: -2.54%
• AVIG: -2.15%
• Cash: 0.04%

Since the official February 11, 2019 inception, our SPW approach to put writing has outperformed PUTW by 0.66% even when IWM, EFA, and EEM have underperformed SPY by an average of 46%. US Large Cap stocks have been the clear winner for the last several years, but is that likely to continue? Valuations suggest the odds favor a globally diversified approach such as ours, and we will stay the course with our approach.

Strategy Adjustments for 2022

The original strategy design was based on the historical success of the CBOE PUT index and the belief that PUT returns could be enhanced with modest accounting leverage and different underlying collateral. By increasing PUT exposure to 125%, and using bond funds instead of T-bills as collateral, returns during the backtest period of 1989-2018 increased by more than 4% per year without requiring any active management. From 2019-2021 the outperformance of this model relative to PUT has been over 6% per year. This is a good confirmation of the methodology when real-time “out of sample” results resemble and even exceed “in sample” backtesting. It’s all too common for investors to experience “strategy decay” in real time trading where performance doesn’t live up to backtested expectations.

In 2022 we are moving our short strikes closer to at the money to replicate model performance. Up until now, we’ve primarily used 40 delta strikes. By moving closer to the money, we’ll increase expected returns with a commensurate increase in volatility. Considering our backtest methodology assumes at the money strikes and only one underlying we feel comfortable with this tradeoff. Members who still feel most comfortable at 40 delta can continue to set their strikes accordingly.  

Additionally, we’re adding a TIPS ETF to our collateral portfolio and will equalize the position sizing across the 3 holdings. TIPS stands for Treasury Inflation Protected Securities, which gives us the dual benefit of US Treasury quality and protection against higher than expected inflation.

ETFBuyWrite 2021 Year In Review

ETF BuyWrite is an additional strategy available within Steady PutWrite at no additional cost. It’s well suited to buy and hold equity ETF investors who are tax sensitive and like the idea of adding additional income via covered calls. Technically our short call is not a “covered call”, as we write our calls on XSP, the S&P 500 mini-SPX cash settled index. I wrote two blog posts in 2021 that followers may want to consider reading to see how impactful tax efficient investing can be over time.

ETF BuyWrite returned 23.6% in 2021, outperforming it’s benchmark by 8.25%. Selling XSP calls contributed 0.9% of the profits, which I am very pleased with considering the underlying S&P 500 was up 26.9%. This was a strong confirmation of the decision to sell calls out of the money, which I found to be supported by historical data. Nothing is changing with this portfolio for 2022, and I continue to believe it’s underappreciated by most members of our community. The portfolio is diversified across globally equities with a tilt towards small cap and value factors via Avantis ETF’s.

Conclusion

2021 was a good year for Steady PutWrite, and a really good year for ETF BuyWrite. The changes made to Steady PutWrite should help to make the strategy even better going forward, and ETF BuyWrite is well positioned to capture the historical opportunity in value stocks. I expect outperformance in 2022 for both strategies relative to their benchmarks, and members with sufficient sized portfolio may want to consider utilizing both strategies if they aren’t already.

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.