SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

The Downside of Anchor


Leveraged Anchor and its diverse counterpart have been performing above expectations so far this year. In fact, since Diversified Leveraged Anchor launched in April, it is up over 40% while the same index blend (SPY, QQQ, IWM, EFA) are up just over 33%. This has led to a growing increase in interest of the product, particularly given its hedged nature. 

Our confidence in the strategy continues to grow as well; enough that we are exploring how to more broadly market it next yearwith a goal of getting to $100m or more under management on the strategy.


Unfortunately, it has also led to some misunderstanding of what the strategy is capable of. In the past few weeks, I have received statements such as:

  • "I love being in a strategy that can’t go down.”
  • “I can’t believe I can beat the market without risk.”
  • “I like being able to sleep knowing my maximum drawdown is 5% or less.”
  • “I’m worried that I might lose all of my money in Anchor, can you explain it better?”

None of these statements are true.  Leveraged Anchor absolutely can, and at times will, go down.  There is certainly risk, and the maximum drawdown potential is over five percent.  At the same time, the only way to lose all your money is if the options markets completely collapse and cease to function.  The purpose of this article is to provide some clarity on these issues.

First, the strategy can, and will, go down.  If an individual invests $100,000 and purchase protection five percent out of the money, then the expected scenario in a market crash is the account drops to at least $95,000.  Actual performance may be slightly better or slightly worse.  If volatility goes up and the delta of the long calls declines, the account might not go down that much.  On the other hand, if volatility does not drop very much and the decline is not that sharp, the position may lose on the short puts and the decline may be worse (maybe in the 7%-9% range, depending on the changes in volatility).  In either case, a drawdown can certainly occur.  It is a virtual certainty at some point that the accounts go down in value.
 

Second, an assumption that Anchor cannot go down ignores the fact that the strategy does not roll the hedge every day.  Take the following situation:

  1. Open an account for $100,000 and hedge at $95,000;
  2. The account grows to $108,000 (right about the time to roll); and
  3. Just before rolling the long hedge, the market drops 50%.

The drop on the investor’s account will be back down to around the $95,000 level, plus or minus a couple of percentage points based on the performance of the short puts.  While this is a five percent loss from the opening balance it is twelve percent loss from the account high.  Investors need to remember the strategy protects from the opening level (or rolled level)not from the current high.
 

This leads to the question of why the hedge is not rolled more frequently, even up to every time the market goes up.  The simplest explanation is cost.  The largest drag on Anchor is the cost of the hedge.  Every time the hedge is rolled, the strategy incurs a cost.  At some point it becomes impossible to pay for the hedge in a year.  However, given that the strategy rolls as the market goes up, and the position is levered, the strategy can afford to incur some increased costs. 

There has been significant testing into the “optimal” time to roll the hedge.  What was learned is “optimal” is fluid – based on volatility, time left in the prior hedge, and a few other factors.  This led to the creation of a “range” on which to roll.  It is known if we roll every five percent market gain the costs can overwhelm performance.  If rolls only occur after 12.5% or more gains, then money is left on the table on drawdowns.  Thus, the rule of thumb of “7.5% to 10%” was created.


If you are an investor who is more conservative, comfortable with limiting upside some, then more frequent rolls of the hedge are fine.  If you are a longer term, more aggressive, growth investor, then less frequent rolls are just as acceptable.


Another factor many do not consider is the impact of using leverage.  The amount of leverage does matter and impacts risk of the portfolio.  Leveraged Anchor performs the worst in markets that are flat for long periods of time or that decline slowly in small amounts.  If the market slowly bleeds (1%-3%) over a three-week period, the strategy takes small losses on the short puts, without actually gaining on the long puts. 

One of the worst possible outcomes for the strategy would be if the market loses 1% every quarter for four quarters in a row in a very uniform manner.  Under that scenario, the strategy has lost money on selling the puts short (e.g., not paid for the hedge), has lost money on the calls (because the 5% hedge never kicks in – the market is only down 4%), and even the puts covering the shorts will not have increased in value.  It is entirely possible for the market to be down 4% and the strategy down 10%, or more. 


The use of leverage worsens this problem, as the cost of hedging has gone up, and if the hedge is not paid for, that increased cost has a larger impact.  A portfolio with no hedging may have a maximum loss of 8%, while a portfolio with over 100% leveraged may double such losses in small declining markets.  (Please note such numbers are for example only.)


Leveraged Anchor accepts this risk as historically less than 15% of annual stock markets tend to meet the “flat” criteria.  If the strategy outperforms in up markets and outperforms in large down markets, we feel having underperformance 15% of the time is acceptable.  This is particularly true for the long-term investor.  Of course, there is no guarantee that historic trends continue, and all Anchor investors should be aware of the markets in which the strategy may underperform expectations.


No investor should think Leveraged Anchor is risk free, that drawdowns are not possible, or that the strategy will outperform in all market conditions.  Such statements simply are not true.  What investors should expect is superior performance due to leverage in bull markets and having catastrophic market protection.  Given most market drawdowns are of the significant variety, this helps investors sleep.  The strategy provides superior risk adjusted returns – not risk free.
 

Christopher Welsh is a licensed investment advisor in the State of Texas and is the president of an investment firm, Lorintine Capital, LP which is a general partner of three separate private funds. He is also an attorney practicing in Dallas, Texas. Chris has been practicing since 2006 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. He offers investment advice to his clients, both in the law practice and outside of it. Chris has a Bachelor of Science in Economics, a Bachelor of Science in Computer Science from Texas A&M University, and a law degree from Southern Methodist University. Chris manages the Anchor Trades portfolio, the Steady Options Fund, and oversees Lorintine Capital's distressed real estate debt fund.
 

Related articles:

 

 

What Is SteadyOptions?

12 Years CAGR of 115.5%

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • When Investors Lose Their Nerve

    It was a rough end to the week for markets, with a sharp sell-off on Friday reminding investors just how quickly sentiment can turn. For anyone who sold in late summer anticipating a correction and then bought back in at the start of October, that one-day drop might have felt like confirmation that they can’t win.

    By Kim,

    • 0 comments
    • 280 views
  • Uncovering Common Cryptocurrency Trading Mistakes For Beginners

    Are you tempted by the shining allure of crypto trading? You aren’t alone. Decentralized cryptocurrencies hold perhaps the most tempting investment pull of a generation, especially amongst young or beginner investors. After all, by painting a different way to buy and sell, cryptocurrency offers something new that we’re all keen to get in on. 

    By Kim,

    • 0 comments
    • 6929 views
  • Buy Call, Sell Put Strategy Explained | SteadyOptions

    The Sell Put And Buy Call Strategy is an example of a synthetic stock options strategy: using call and puts options to mimic the performance of a position, usually involving the purchase of a stock. We saw this when looking at the synthetic covered call strategy elsewhere.

    By Chris Young,

    • 0 comments
    • 67366 views
  • Long Straddle Options Strategy | Maximize Profits with Big Moves

    Straddle Options Definition
    An options straddle strategy is buying (or selling) both a put and call option with the same strike price and expiration date for the same underlying asset, and paying both the put and call premiums.

    By Pat Crawley,

    • 0 comments
    • 67853 views
  • Gamma Scalping Options Trading Strategy

    Gamma scalping is a sophisticated options trading strategy primarily employed by institutions and hedge funds for managing portfolio risk and large positions in equities and futures. As a complex technique, it is particularly suitable for experienced traders seeking to capitalize on market movements, whether up or down, as they occur in real-time.

    By Chris Young,

    • 0 comments
    • 30663 views
  • Long Gamma vs Short Gamma: Options Strategy Explained

    Gamma is one of the primary Options Greeks, which measure an option's sensitivity to specific factors that could affect an option price. Despite traders hyping up several different Greeks and second-order Greeks like "Vanna" and "charm," there are only four primary Greeks that you need to be familiar with to understand options trading.

     

    By Pat Crawley,

    • 0 comments
    • 50193 views
  • Predicting Probabilities in Options Trading: A Deep Dive into Advanced Methods

    In options trading, the focus should not be on predicting the exact closing price of a ticker on a given date - a near-impossible task given the pseudo-random nature of markets. Instead, we aim to estimate probabilities: the likelihood of a ticker being above a specific value at a certain point in time. This perspective turns trading into a probabilistic exercise, leveraging historical data to make informed decisions.

    By Romuald,

    • 1 comment
    • 17032 views
  • SteadyOptions 2024 - Year in Review

    2024 marks our 13th year as a public trading service. We closed 136 winners out of 187 trades (72.7% winning ratio). Our model portfolio produced 116.7% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month (of 0.6% loss) in 2024. 

    By Kim,

    • 0 comments
    • 6506 views
  • Wheel Strategy Options: Master Wheel Trading Explained

    The “wheel” trade is variously described as a beginner’s strategy, a combination to exploit features of both calls and puts, and as “perfect” solution to the well-known risks of shorting calls, even when covered. The options wheel strategy is an income-generating options trading strategy that both beginners and experienced traders can leverage for profit.

    By Pat Crawley,

    • 0 comments
    • 76183 views
  • Why Dollar Delta Will Change Your Trading

    Delta is one of the four main option Greeks, and any serious trader needs to have a thorough understanding of this greek if they hope to have any chance of success in the trading options. If you’re a beginner, you can visit my blog to learn more about understanding option delta

    By GavinMcMaster,

    • 0 comments
    • 36636 views

  • Thanks 1
  Report Article


We want to hear from you!


Thank you Chris for an excellent description of the risks.

I have been in the stock market for almost two decades, and I must admit that I have never seen a strategy that performs so well in most market conditions. It is outperforming the indexes by 5-7% a year second year in a row, and March 2020 crash proved that it also provides an excellent hedge (the Anchor portfolio was actually UP at some point in March while the major indexes were down 35-40%). 

That said, no strategy will outperform under all market conditions. It's important to have realistic expectations and be aware of the risks. We always provide a full disclosure to our members.

Share this comment


Link to comment
Share on other sites

Would love to see this as an ETF so I could put some of my IRA funds there and not have to worry about messing with it.   

Share this comment


Link to comment
Share on other sites

On 12/13/2020 at 7:29 AM, FrankTheTank said:

Would love to see this as an ETF so I could put some of my IRA funds there and not have to worry about messing with it.   

That's ideally the long term plan (or a mutual fund), but being a little shop, market makers, brokers, and the like tend to ignore me.  So we're launching an actual fund structure. If I can get assets north of $25m or so and run it for 1-2 years, the conversion becomes much easier.

Share this comment


Link to comment
Share on other sites


"Another factor many do not consider is the impact of using leverage.  The amount of leverage does matter and impacts risk of the portfolio.  Leveraged Anchor performs the worst in markets that are flat for long periods of time or that decline slowly in small amounts.  If the market slowly bleeds (1%-3%) over a three-week period, the strategy takes small losses on the short puts, without actually gaining on the long puts."

can you give some examples of the slow sideways bleed and the performance during that period?

Share this comment


Link to comment
Share on other sites



Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
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