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cwelsh

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Welcome to Anchor Trades!

 

I would like to personally welcome all our members, those who have come from SteadyOptions, Seeking Alpha, and those which have come from elsewhere. I would encourage everyone to read the Anchor Frequently Asked Questions and the Anchor Trade Strategy topics. Those two topics should provide answers to the majority of your questions, as well a detailed discussion on what the Anchor Strategy is all about. 

 

You can see the Anchor Trades performance here.

 

So What is an Anchor Trade?

 

To put it simply, an Anchor Trade should be one that forms the keystone of any investment portfolio -- that reliable corner that you know you can depend on, regardless of market conditions. The one that lets you sleep at night, knowing your money is at work, but not subject to large risks.

 

An Anchor trade's goal is to prevent loss of capital while still generating a positive net return in all market conditions. This strategy began with the premise that it must be possible to virtually fully hedge against market losses, without sacrificing all upside potential. Anchor trades are concerned for full year, full portfolio, protection, regardless of market conditions.

 

Many investors try to insure against losses after those losses have already been incurred, or as they are occurring in real time – this is a mistake. It’s easy to be an investor during a prolong bull market, but what happens when a severe, or even mild, market correction occurs? At that point many investors find themselves trapped in falling positions, have stop losses kicking in, and are at a loss as what to do – other than to watch their principle dissipate. In the modern era of flash crashes, swift market volatility changes, and world risk it simply makes no sense to be invested in anything without portfolio protection. It is impossible to routinely predict the next negative major market event, therefore 365 days of protection is a necessity. I have given up trying to predict the day to day movements of the market -- therefore I Anchor my portfolio with this strategy (which can easily then be paired with other strategies).

 

In the current market environment, such precautions are particularly warranted. It is my opinion that much of the recent market gains have been artificially propped up by low interest rates, the Federal Reserve, and the lack of alternative investment choices which can provide income to investors. At some point in the future the market is due, at the very least, for a correction, if not a significant down turn. With increasing turmoil in Syria, North Korea, and elsewhere in the Middle East, who knows what could tip the markets. Will this occur within two weeks, six months, one year, or even longer is something I've given up trying to predict. Rather I seek to protect against such events – whenever they may occur.

 

Some strategies try to partially hedge against market risk through long short strategies, through the straight purchase of puts (typically out of the money at a substantial cost to the portfolio), through default swaps, or through numerous other instruments. However, each of these strategies only offers partial portfolio protection which either comes at a cost or which just assumes a set loss in the portfolio (such as ten or fifteen percent) is acceptable. I refuse to accept that philosophy and have developed a strategy around annual portfolio protection.

 

Performance targets

 

Over the past few months I’ve been exposed to Swan Global Investment’s Defined Risk Strategy, which is remarkably similar to Anchor (except, as shown below, Anchor tends to perform better).  Swan solves the goal defining issue through a “Target Return Band” shown below:

Target-Return-Band-Overview-Swan-Blog-1.png

The theory being that their Defined Risk Strategy should fall within or above the blue range.  The red line represents the theoretical return of the S&P 500, the yellow line is the Swan’s Defined Risk Return target returns when contrasted with the S&P 500 return at the point.

Defining The Anchor Strategy describes the profits targets for the Anchor strategy.

 

The impact of not experiencing losses in down market years, while only slightly lagging (if lagging at all) in positive and neutral years, is astronomical over any extended period of time. Utilizing the Anchor strategy over a number of years, particularly if any of those years are bear markets, should lead to the strategy significantly outperforming the markets as a whole, as back-testing has demonstrated. Even in prolonged bull markets, the returns should still be positive and lag negligibly behind. The peace of mind which comes with being fully hedged more than compensates for the potential of slightly underperforming the market as a whole in prolonged bull scenarios.

 

Special thanks to Reel Ken, Kim Klaiman, and others who helped me evolve this strategy to its current form through their articles and discussions.

 

Anchor Trade objective

 

The Anchor strategy's s primary objective is to have positive returns in all market conditions on an annual basis

 

Anchor Trades will be divided into two separate forums:

 

1. The Anchor Trades forum will post my actual trades from my individual account, including weekly rolls, and any adjustments I make, as well as the price I received when filled. It will also include a thread for "model" trades that will be launched monthly. Model trades will be for those members who join after the initial actual trades are established, so any member can set up their own Anchor Portfolio. This way any member, regardless of when they join, will have a thread to follow applicable from their initial membership date. If you want to get notifications about the trades, you should follow this forum (by clicking "Follow this forum" button). If you follow this forum, you will receive an email when a new topic (trade) is posted.

 

2. The Anchor Trades Discussions forum will discuss each trade that has been made, detail the calculations behind the decision, and provide a Q&A forum for members to ask about any one trade. The thread will also have columns about the theory behind the Anchor strategy, implementation discussions, and be open to members to ask general questions.

The Anchor objective is to produce equity like returns over a full market cycle, with reduced volatility and bear market drawdowns. Investors should expect a trade-off of reduced upside capture during extreme bull market gains. Given our belief that the long term is the only investment time frame that truly matters, we believe the strategy provides attractive mathematical and psychological benefits to investors seeking the long term growth potential of the US stock market.

 

If you have any questions about the threads, where information can be found, or just general questions, please feel free to send a message to either Kim or myself. I look forward to helping all member learn about this strategy and hopefully implement it themselves.

 

Past Performance and backtesting

 

To minimize the effect of stock selection (for better and worse), we switched to ETF model in 2014. Here are the results of the backtesing for 2007-20013:

 

etf_backtesting.PNG

 

As we can see, the strategy achieved its official goals in all years except for 2011. The strategy did lag the S&P by 2.5% in 2011, but outperformed by 2-4% in 2010 and 2013. In fact, when you remove 2008 and calculate the non-compounded return, you get 82.12% for the strategy vs. 82.77% for the S&P. 2008 performance was exactly as expected, and this made the whole difference.

January 2019 update - Leveraged Anchor

In January 2019 we started tracking the leverage version of the Anchor for performance purposes. The leveraged version has been extensively backtested to fine tune the system for optimal results. Here are the highlights of the new implementation:

 

  1. We now use deep in the money calls, as opposed to long stock positions, and we are able to gain leverage without having to utilize margin interest.  Given the rising interest rate environment we are in, and the high cost of margin interest rates generally, this can lead to significant savings;
     
  2. When we enter the trade, we look for a long call that has a delta of around 90.  As the market falls, delta will shrink.  For instance, if SPY were to decline ten percent, our long calls would have declined by less than nine percent.  The closer we get to our long strike, the slower this decline;
     
  3. In the event of very large crashes, we can actually make money.
     
  4. Losses are capped.  In the above example, the maximum loss is 9.5%.  This can increase if we keep rolling the short puts throughout the downturn, but in any one “crash,” losses are limited to the ten percentage point mark (in Traditional Anchor this 9.5% max loss in one period is better, coming in at 8.5%).  If we apply a momentum filter as well, then the risk of continuingly losing on the short puts declines;
     
  5. In larger bull markets, the Leveraged Anchor outperforms both Traditional Anchor and simply being long stock as there is actual leverage being used.  Some of this will depend on just how fast the market is rising and how often the long hedge is rolled, but in large bull markets, it should still regularly outperform.  In fact, in any one period where the market grows more than 3.5% to 4.0%, the Leveraged Anchor will outperform simply being long SPY.  The Leveraged version of Anchor will always outperform Traditional Anchor in any up markets.

 

One question that must be addressed is just how much leverage to use?  Luckily this is very easy to model on a thirty day period:

image.png

Above is a table showing the performance of SPY, then using 25% leverage, 50%, and 75% leverage after certain market moves over a thirty day period.  After reviewing the above, and similar tables over longer periods of time, we made a decision that utilizing 50% leverage was optimal.  You of course can adjust, taking on more leverage, or less, as you see fit.  Note the above table does not include any gains from BIL dividends.  That should add around 10 to 20 basis points more performance per month on the leveraged versions.

Overall, we should expect the leveraged to slightly outperform the market in strong bull markets, significantly outperform in strong bear markets, and slightly underperform in sideways or slightly up/down markets (+-10%).

More information:

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Please find below the Anchor Strategy historical performance.

 

The projected portfolio to use in back testing was developed using the exact same equities which were used over the past year in testing with live money. 

 

The strategy went "live" using real money, on March 30, 2012 -- here's the table of results:

 

Date               Strategy Return   S&P 500 Return    Difference

3/30/12           Inception        

4/30/12           2.0880%             -0.7500%                  2.838%

5/31/12           4.6525%               -6.2651%                10.918%         

6/30/12           1.8912%                 3.9563%                 -2.065%

7/31/12           3.7223%                 1.2590%                  2.463%

8/31/12          -0.1001%                1.9763%                 -2.076%

9/30/12          -1.0422%              2.4236%                 -3.466%

10/31/12        -0.4122%             -1.9789%                  1.567%

11/30/12          0.5026%              0.2847%                  0.218%

12/31/12        -0.3925%               0.7068%                -1.099%

1/31/13           2.6577%                 5.0428%               -2.385%

2/28/13           3.2056%               1.1061%                 2.100%

3/31/13           3.7856%               3.5988%                 0.187%

4/30/13           1.7852%               1.8086%                -0.023%

5/31/13          -3.8266%               2.0763%                -5.903%

6/30/13           2.2937%              -1.4999%                 3.794%

7/31/13          -0.0640%               4.8690%            -4.9340%

8/31/13          -4.0800%               -2..654%             -1.4300%

9/30/13           0.4259%                2.5479%             -2.1220%

10/31/13         5.2308%                4.8580%               0.3730%

11/30/13         -0.4673%               2.4143%               -2.882%

1/1/2014        0.6087%                  2.3563%              -1.748%

2/1/2014         -3.6542%              -3.5583%            -0.096%

3/1/2014         1.5753%                   4.3117%           -2.7364%

4/1/14           0.843%               0.6932%            0.150%

----------------------------------------------------------------------

Total:              22.510%        32.934%          -10.425%

2013 Total:       11.69%           29.60%            -17.94%

2014 YTD       -1.3115%         1.2974%         -2.609%

 

Currently hedged at March 2015 189

 

Backtested results for 2007-2012:

 

Year       Strategy return   S&P 500 Return      Difference

2012                13.527%            13.406%                  0.121%  

2011                18.368%             -0.003%                18.371%

2010                20.574%            12.783%                  7.791%

2009                23.717%            23.454%                 0.263%

2008                27.908%           -38.483%              66.391%

2007                  5.221%                3.530%                 1.691%

Total:       109.215%        14.687%          94.628%

 

As of 2014, I switched over to an ETF only model. Here are the backtesting results for the ETF model:

 

post-1-0-34512900-1396035530_thumb.png

 

Years 2008 and 2009 are displayed below to show how the strategy would have performed in recent bull and bear markets.  The first column shows what the results of simply holding the equities, without any hedging (e.g. 100% long), in order that you may evaluate returns outside of stock selecting skill and/or good fortune to see the full benefit of the Anchor strategy hedging techniques.  The below calculations include dividends paid, margin interest costs, and trading costs .

 

Date             Equities only     Strategy Return  Return on S&P 500   Difference

12/31/07          Inception

1/31/08            0.298%                   0.298%            -6.116%                   6.414%

2/28/08           -2.407%                  -2.407%            -3.476%                  0.069%

3/31/08            3.961%                   3.961%             -0.596%                 4.557%

4/30/08            3.746%                   3.746%              4.755%                -1.009%

5/31/08            1.971%                   2.923%              1.067%                 1.855%

6/30/08           -8.064%                   5.927%             -8.596%                 2.669%

7/31/08            1.822%                   4.866%              -0.986%                 5.852%

8/31/08            5.065%                   2.712%               1.219%                 1.493%

9/30/08           -0.955%                   2.076%             -9.079%               11.155%

10/31/08         -8.960%                 10.975%             -9.079%               27.917%

11/30/08         -6.139%                   4.778%              -7.485%              12.263%

12/31/08          5.836%                  -2.120%               0.782%               -2.902%      

Total:           -5.159%          27.908%        -38.486%         66.394%

 

During one of the largest bear markets in the last two decades the Anchor Strategy would not have only outperformed the S&P 500 by a significant amount (over 66%), but would have had outside returns due to the value of the hedge itself (which occurred due to increasing volatility).  Please note these results are not typical in small bear markets.  In smaller bear markets, a member should still expect a positive return, just one much smaller in nature.  As can be seen, some of the returns were certainly due to the equities selected, as the model portfolio would have only lost five percent, as compared to the general loss of the market.  That aside, the strategy still outperformed a one hundred percent long position by almost thirty three percent.

 

Date             Equities only     Strategy Return    Return on S&P 500     Difference

12/31/08          Inception

1/31/09            0.076%                  1.852%              -8.566%               10.418%

2/28/09           -9.605%                 -5.847%           -10.993%                 5.146%

3/31/09            7.927%                10.692%               8.540%                  2.151%

4/30/09            3.687%                  4.882%               9.393%                -4.510%

5/31/09            3.362%                 -3.757%               5.308%                 -9.095%

6/30/09            1.327%                 -3.288%               0.020%                -3.307%

7/31/09            6.679%                  2.547%               7.414%                 -4.867%

8/31/09            4.690%                  1.992%               3.356%                 -1.364%

9/30/09            3.442%                13.187%               3.572%                  9.615%

10/31/09          0.026%                 -4.321%              -1.976%               -2.345%

11/30/09          5.306%                  2.629%                5.736%                -3.107%

12/31/09          3.327%                  2.703%               1.777%                  0.926%        

Total:         33.315%           23.717%        23.454%            0.263%

 

In a full bull market, where the S&P 500 returned over twenty percent, the strategy returned virtually identical performance to the market as a whole.  Some of the gain can be attributed to the stock selection as simply taking a one hundred percent long position on the same equities held by would have returned ten percent more than the hedged position.  Even taking stock selection skill and/or fortitude out of the equation, the strategy still would have had significant positive returns, meeting The Anchor strategy's stated objectives.

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Here's my opinion:

 

By and large the big dividend paying stocks have significantly underperformed the market, really starting in May.  This has a little to do with raising interest rates and the fact that you now can get bonds on par with what the dividend payers are paying.  A year ago, you could get a 2x yield on a dividend stock / treasury.  You cannot anymore, so the market has sold off and some of those funds have transferred to higher beta stocks or to bonds.  Given the fact that I predicted the interest rate rise remarkably well, I guess I should have seen this repercussion, but I did not.

 

The re-weighting of the ETFs in August was a direct result of the above described change.  I felt that, with the sell off in dividend payers, they were due for a rebound, so weighting a little higher in the dividend paying etfs (as opposed to the equal weight RSP), would catch that rebound.  It obviously did not in August, so I switched back for September.  We'll see if it pans out over time.

 

I'll do a full quarterly review of all of the stocks in October, I try not to rush in and out of stocks, unless there's been some sort of major market news on a specific equity, and stick with my long term analysis of my holdings -- that's the whole point of the strategy after all. 

 

And let's not forget that this is a year-to-year strategy, so there will be a full 2%+ in dividends received, as well as higher returns as the hedge gets more and more paid off. 

 

The good news is that my actual fund, as well as all of the model portfolios are still completely on track to pay for the hedge on the year, which is our primary objective. 

 

As always, thoughts, questions, and criticisms are appreciated. 

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Let me add my two cents.

 

While 3 months since the strategy started as a public service is too short to jump to any conclusions, but lets take a look at June model portfolio since it has the longest history (3 months of data).

 

This was one of the worst possible periods for dividend stocks - and yet the stock portfolio performance was almost identical to S&P.

 

Chris mentioned few times that the worst case for the Anchor strategy is being whipsawed around your long put strike. This is exactly what happened several times during the last 3 months. Despite those not favorable market conditions, the ETF portfolio (which eliminates the impact of stock selection) outperformed the S&P by 3%.

 

To me, the performance during those 3 months just proves how powerful this strategy is.

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On 5/14/2013 at 8:19 PM, cwelsh said:

Welcome to Anchor Trades!

 

I would like to personally welcome all our members, those who have come from SteadyOptions, Seeking Alpha, and those which have come from elsewhere. I would encourage everyone to read the Anchor Frequently Asked Questions and the Anchor Trade Strategy topics. Those two topics should provide answers to the majority of your questions, as well a detailed discussion on what the Anchor Strategy is all about. 

 

You can see the Anchor Trades performance here.

 

So What is an Anchor Trade?

 

To put it simply, an Anchor Trade should be one that forms the keystone of any investment portfolio -- that reliable corner that you know you can depend on, regardless of market conditions. The one that lets you sleep at night, knowing your money is at work, but not subject to large risks.

 

An Anchor trade's goal is to prevent loss of capital while still generating a positive net return in all market conditions. This strategy began with the premise that it must be possible to virtually fully hedge against market losses, without sacrificing all upside potential. Anchor trades are concerned for full year, full portfolio, protection, regardless of market conditions.

 

Many investors try to insure against losses after those losses have already been incurred, or as they are occurring in real time – this is a mistake. It’s easy to be an investor during a prolong bull market, but what happens when a severe, or even mild, market correction occurs? At that point many investors find themselves trapped in falling positions, have stop losses kicking in, and are at a loss as what to do – other than to watch their principle dissipate. In the modern era of flash crashes, swift market volatility changes, and world risk it simply makes no sense to be invested in anything without portfolio protection. It is impossible to routinely predict the next negative major market event, therefore 365 days of protection is a necessity. I have given up trying to predict the day to day movements of the market -- therefore I Anchor my portfolio with this strategy (which can easily then be paired with other strategies).

 

In the current market environment, such precautions are particularly warranted. It is my opinion that much of the recent market gains have been artificially propped up by low interest rates, the Federal Reserve, and the lack of alternative investment choices which can provide income to investors. At some point in the future the market is due, at the very least, for a correction, if not a significant down turn. With increasing turmoil in Syria, North Korea, and elsewhere in the Middle East, who knows what could tip the markets. Will this occur within two weeks, six months, one year, or even longer is something I've given up trying to predict. Rather I seek to protect against such events – whenever they may occur.

 

Some strategies try to partially hedge against market risk through long short strategies, through the straight purchase of puts (typically out of the money at a substantial cost to the portfolio), through default swaps, or through numerous other instruments. However, each of these strategies only offers partial portfolio protection which either comes at a cost or which just assumes a set loss in the portfolio (such as ten or fifteen percent) is acceptable. I refuse to accept that philosophy and have developed a strategy around annual portfolio protection.

 

Performance targets

 

Over the past few months I’ve been exposed to Swan Global Investment’s Defined Risk Strategy, which is remarkably similar to Anchor (except, as shown below, Anchor tends to perform better).  Swan solves the goal defining issue through a “Target Return Band” shown below:

Target-Return-Band-Overview-Swan-Blog-1.png

The theory being that their Defined Risk Strategy should fall within or above the blue range.  The red line represents the theoretical return of the S&P 500, the yellow line is the Swan’s Defined Risk Return target returns when contrasted with the S&P 500 return at the point.

Defining The Anchor Strategy describes the profits targets for the Anchor strategy.

 

The impact of not experiencing losses in down market years, while only slightly lagging (if lagging at all) in positive and neutral years, is astronomical over any extended period of time. Utilizing the Anchor strategy over a number of years, particularly if any of those years are bear markets, should lead to the strategy significantly outperforming the markets as a whole, as back-testing has demonstrated. Even in prolonged bull markets, the returns should still be positive and lag negligibly behind. The peace of mind which comes with being fully hedged more than compensates for the potential of slightly underperforming the market as a whole in prolonged bull scenarios.

 

Special thanks to Reel Ken, Kim Klaiman, and others who helped me evolve this strategy to its current form through their articles and discussions.

 

Anchor Trade objective

 

The Anchor strategy's s primary objective is to have positive returns in all market conditions on an annual basis

 

Well how in the world does it do that?

 

Step 1 - Stock selection

Step 2 - Fully hedge

Step 3 - Earn back the cost of the hedge

 

Anchor Trades will be divided into two separate forums:

 

1. The Anchor Trades forum will post my actual trades from my individual account, including weekly rolls, and any adjustments I make, as well as the price I received when filled. It will also include a thread for "model" trades that will be launched monthly. Model trades will be for those members who join after the initial actual trades are established, so any member can set up their own Anchor Portfolio. This way any member, regardless of when they join, will have a thread to follow applicable from their initial membership date. If you want to get notifications about the trades, you should follow this forum (by clicking "Follow this forum" button). If you follow this forum, you will receive an email when a new topic (trade) is posted.

 

2. The Anchor Trades Discussions forum will discuss each trade that has been made, detail the calculations behind the decision, and provide a Q&A forum for members to ask about any one trade. The thread will also have columns about the theory behind the Anchor strategy, implementation discussions, and be open to members to ask general questions.

The Anchor objective is to produce equity like returns over a full market cycle, with reduced volatility and bear market drawdowns. Investors should expect a trade-off of reduced upside capture during extreme bull market gains. Given our belief that the long term is the only investment time frame that truly matters, we believe the strategy provides attractive mathematical and psychological benefits to investors seeking the long term growth potential of the US stock market.

 

If you have any questions about the threads, where information can be found, or just general questions, please feel free to send a message to either Kim or myself. I look forward to helping all member learn about this strategy and hopefully implement it themselves.

 

Past Performance and backtesting

 

To minimize the effect of stock selection (for better and worse), we switched to ETF model in 2014. Here are the results of the backtesing for 2007-20013:

 

etf_backtesting.PNG

 

As we can see, the strategy achieved its official goals in all years except for 2011. The strategy did lag the S&P by 2.5% in 2011, but outperformed by 2-4% in 2010 and 2013. In fact, when you remove 2008 and calculate the non-compounded return, you get 82.12% for the strategy vs. 82.77% for the S&P. 2008 performance was exactly as expected, and this made the whole difference.

January 2019 update - Leveraged Anchor

In January 2019 we started tracking the leverage version of the Anchor for performance purposes. The leveraged version has been extensively backtested to fine tune the system for optimal results. Here are the highlights of the new implementation:

 

  1. We now use deep in the money calls, as opposed to long stock positions, and we are able to gain leverage without having to utilize margin interest.  Given the rising interest rate environment we are in, and the high cost of margin interest rates generally, this can lead to significant savings;
     
  2. When we enter the trade, we look for a long call that has a delta of around 90.  As the market falls, delta will shrink.  For instance, if SPY were to decline ten percent, our long calls would have declined by less than nine percent.  The closer we get to our long strike, the slower this decline;
     
  3. In the event of very large crashes, we can actually make money.
     
  4. Losses are capped.  In the above example, the maximum loss is 9.5%.  This can increase if we keep rolling the short puts throughout the downturn, but in any one “crash,” losses are limited to the ten percentage point mark (in Traditional Anchor this 9.5% max loss in one period is better, coming in at 8.5%).  If we apply a momentum filter as well, then the risk of continuingly losing on the short puts declines;
     
  5. In larger bull markets, the Leveraged Anchor outperforms both Traditional Anchor and simply being long stock as there is actual leverage being used.  Some of this will depend on just how fast the market is rising and how often the long hedge is rolled, but in large bull markets, it should still regularly outperform.  In fact, in any one period where the market grows more than 3.5% to 4.0%, the Leveraged Anchor will outperform simply being long SPY.  The Leveraged version of Anchor will always outperform Traditional Anchor in any up markets.

 

One question that must be addressed is just how much leverage to use?  Luckily this is very easy to model on a thirty day period:

image.png

Above is a table showing the performance of SPY, then using 25% leverage, 50%, and 75% leverage after certain market moves over a thirty day period.  After reviewing the above, and similar tables over longer periods of time, we made a decision that utilizing 50% leverage was optimal.  You of course can adjust, taking on more leverage, or less, as you see fit.  Note the above table does not include any gains from BIL dividends.  That should add around 10 to 20 basis points more performance per month on the leveraged versions.

Overall, we should expect the leveraged to slightly outperform the market in strong bull markets, significantly outperform in strong bear markets, and slightly underperform in sideways or slightly up/down markets (+-10%).

More information:

Can you add a description for step 3 here too please

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thanks, I will work on Step 1 and create my portfolio.  Kindly let me know what I have to do for step 2, Just to keep it simple I would hedge it for 100K even if my portfolio is little more then that.

 

Step 2 - Fully hedge

Step 3 - Earn back the cost of the hedge

Also, how can I follow step 3, I joined for a few weeks now but did not get any alert or able to follow the Master roll thread posts like: 

https://steadyoptions.com/forums/forum/topic/4946-master-roll-thread/?do=findComment&comment=133362

https://steadyoptions.com/forums/forum/topic/4946-master-roll-thread/?do=findComment&comment=133373

Please bear with me, I am new to this but follow steadyoptions-trades were quite earlier for me since every tread is a new thread.

 

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2 minutes ago, ramn said:

thanks, I will work on Step 1 and create my portfolio.  Kindly let me know what I have to do for step 2, Just to keep it simple I would hedge it for 100K even if my portfolio is little more then that.

 

Step 2 - Fully hedge

Step 3 - Earn back the cost of the hedge

Also, how can I follow step 3, I joined for a few weeks now but did not get any alert or able to follow the Master roll thread posts like: 

https://steadyoptions.com/forums/forum/topic/4946-master-roll-thread/?do=findComment&comment=133362

https://steadyoptions.com/forums/forum/topic/4946-master-roll-thread/?do=findComment&comment=133373

Please bear with me, I am new to this but follow steadyoptions-trades were quite earlier for me since every tread is a new thread.

 

Last roll was posted on Feb.6

https://steadyoptions.com/forums/forum/topic/4946-master-roll-thread/?do=findComment&comment=134655

You need to follow that topic to get the roll alerts - exactly the same way you follow the SO trades.

More details:

How To Use The Forum

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Thanks, @Kim, I noticed that however, I am trying to find the existing all long and short positions. 

Please correct me if my understanding is wrong: It seems BTC FEB 10 332 P 0.70 means a BTC Jan XX 332 P was closed(long) and FEB 10 332 P was started (short).   Also, are BTC and STO the only two we hedged as part of step 2?

Quote

Today is 2/6/2020 and I'm rolling the short puts:

BTC Feb 10 332 P 0.70

STO Feb 28 334 P 3.58

Net Credit: $2.88

 

Edited by ramn
updated

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Hi @Kim and @cwelsh

I just (re)enrolled in Anchor and find the new system with synthetic stock interesting. I have been looking at all the links provided in the "Welcome" but have a few questions I havent been able to find answers to.

a) When to roll the core synthetics (calls and puts) if ever?

b) The explanation of the strategy states to buy puts ATM - 5%, but other state ATM. Which is it?

c) Am I correct that the puts we short are delta 55, close to ATM? Isnt that "risky" in regard to the current volatility?

d) Why 365 days options and not even longer 730 days? Liquidity?

e) When purchasing the options, where to place our bid: middle of bid/offer or?

f) Several posts warn about opening Anchor now due to high IV, but when I look at current pricing it seems that weekly puts bring in 1/7 of the cost of the 365 day - so high volatility only need to be present for a few more months

g) The system aims at 75% leverage. What risks are the with more leverage (the system makes money in all market situations - except flat)

 

Edited by JacobH

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A couple of follow-up questions:

h) Why do we use SPY and not QQQ

i) I have seen other systems that use VIX as a hedge. VIX tends to move average 16% on a 3% down stock move, which would give even more bang for the buck protection wise. Have VIX calls been considered as a hedge instead of PUT options?

 

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a.  You should roll the calls either (a) after a full year has gone by and you can sell them for a long term gain instead of a short, or (b) after a large market decline to be able to participate in a market rebound.

 

Item B merits discussion.  One of the advantages of using long calls is as the market declines, so does the delta of the long position.  When the position was opened, delta may be around .9 -- which means if the market drops $1, the long calls go down $0.90.  However, as things decline, so does the delta.  So after a crash, the delta might be 0.7.  This means if the market keeps going down, your long position is declining at a decreasing rate, while your long puts have a delta near one.  So in Leveraged Anchor, you're actually better off with a BIGGER crash, as your account can start going up in value.  We saw this actually occur over the last month.  The trade off is as markets rebound your account will go DOWN in value.  This can be combated by, at some point during a decline, rolling the calls down and out to a higher delta.  The disadvantages of such a move include (a) it requires cash, (b) you are realizing a loss on the calls while not realizing a gain on the puts, and (c) if the markets keep going down, you'll be worse off than if you had not rolled down and out.  Of course the long puts are still there, but you will be a bit worse off.

 

a.  As for when to roll the puts, the general answer is only as things go up.  I did post an article discussing when this may not hold true: https://steadyoptions.com/articles/anchor-analysis-and-options-r564/.

 

b.  We normally by the hedge of the long calls 5% out of the money.  They're significantly cheaper than an ATM position.  For instance, the March 31 2021 at the money put (280) is currently trading at $32.  5% in the money (266) is around 26.50.  The first ends up costing the portfolio about 11.5%, the second 9.5%.  So in essence we're "risking" a 3% down turn to get a cheaper hedge.  Given the postive skew of markets over time, and the fact the biggest drag on the portfolio is the hedge, this is a tradeoff most members are happy with.  Though some DO stick to the ATM hedge.   

 

But then we also have to hedge the short puts, which are the most risky portion of the portfolio.  We use ATM puts for that to reduce risk.

 

c.  It depends on if its a new or old portfolio.  For the older ones, for instance the model portfolio, we currently are hedging the short puts at SPY 327, which has a delta of almost one.  So selling a 55 delta put has relatively low risk.  The premium is huge (which is necessary to pay for the more expensive hedge), and the long 327 puts do an awfully good job of hedging it if the market goes down.  If you're opening a new portfolio, yes the risk is higher, but you also need the higher credits to pay for the hedge.  If you're risk adverse, you can always move toward the ATM position, but be more aggressive rolling.

 

d.  Cost, delta, and necessity for adjustments.  On the long call side, your 435 day 200 call (first available after one year), is trading at an .88 delta, the same position 652 days out costs $3 more and has a .82 delta.  Not the largest swing, but one that will make a difference in an up market.  It also cost a bit more to get the same leverage.  On the put side, the same thing applies -- only as we anticipate having to roll the hedge up and out as markets rise, by moving further out in time, you've cut the amount you can roll "up and out."

 

e.  When I purchase the options, I always open the order well off the mid in my favor.  For instance, if I was buying a put and the spread was $1 - $2, I'd probably open the order around $1.25 or so and slowly increase it by a few cents every 30 seconds to a minute.  

 

f.  You are 100% correct -- if vol stays where it is, then the increased volatility will make paying for the more expensive hedge simple. However, if vol drops back to normal levels in a short period, you'll be in trouble.  Another thing to think of, as volatility drops, markets are likely going up -- which means you may have to roll the long hedge frequently (about every 7.5%-10% in market gains).  This increases cost even more, while at the same time the credits you get are declining.  I currently want to see the cost of the portfolio hedge at 8.,5% or lower to feel comfortable.  There's no magic with that number, it's what I'm comfortable with, for those entering a new Anchor, at these levels, they may still be able to pay for the hedge.

 

g.  Target leverage is based on an individual's risk tolerances.  More leverage equals more risk in small market drops.  It also is more volatility, as prices will move more.  It's fairly easy to find the differences different leverage will have using excel.  Just build out the position with various amounts of leverage, and then calculate the value of the portfolio on various stock ending prices.

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h.  SPY is more liquid and more representative of the whole market -- QQQ is tech slanted.  If you have $350k or more, then you could implement a diverse Anchor using IWM, EFA, QQQ, and SPY.

 

i.  We've tried a variety of different hedging techniques and learned that any hedge that does not exactly mirror the underlying instrument results in tracking error at some point.  For instance, at one time we tried a basket of stocks that we liked and hedged with SPY.  Worked great until dividend stocks really under performed SPY and we were heavy in dividend stocks.  We tried using a blend of similar instruments to SPY (SDY, RSP, and VIG), which, over the last 30 years or so, would have outperformed SPY in up markets and down markets.  Until the last three years, in which case SPY outperformed them all and lagged.  Similar on down turns.  If you're not in the SAME instrument, there will be slippage.  You might be ok with that depending on how much and the price.

 

This is called "correlation," and if the two instruments do not have a HIGH degree of correlation, you risk under performance.

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The problem comes in hedging, as the prices do not move in unison.  E.g. if SPY drops $1 a VIX call is not going to go up $1.  

 

I just pulled both charts for today, SPY is up 1.7% and VIX is down 3.2% -- so not only can you not match dollar moves, you can't match percentage moves.

 

I'm not saying there's not a way to do it -- and it might even work better in very large moves down (as VIX can go through the roof quickly), but I'm not sure how comfortable I'd be using as it replacement for SPY puts.

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