Welcome to Anchor Trades

[Kim 8,072]

Important: the first part of this post describes the general concept of the Anchor strategy. In January 2019 the implementation has been changed and Leveraged Anchor was born. The Leveraged Anchor implementation is described in the second part of the post

The strategy description has been provided by Chris Welsh.
 

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

 

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. 

 

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.

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. See How Anchor Survived The 2020 Crash.
    
4. Losses are capped.  In the below 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; Please read The Downside Of Anchor for more details.
    
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, with SPY at 250:
 

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%).

You can read more about the strategy here.

Since inception, the leveraged Anchor is up 223.3%, compared to S&P 500 return of 134.7% (as of 12/31/2024).

We also recommend reading How Anchor Survived the 2020 Crash. On March 19 2020, SPY at 234 (down 30%), Anchor UP $5k (~3%). Click here for a full analysis of 2022 performance.

 

[JacobH 2]

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)

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?

 

Edited April 9, 2020 by JacobH

[cwelsh 1,588]

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.

 

h.  SPY is more liquid and more representative of the whole market -- QQQ is tech slanted.  If you have $200k 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.

[JacobH 2]

@cwelsh Thank you for a very thorough and quick answer to my questions....

In regard to VIX, it has beta almost 1 as it is the volatility of the SP500... 

[cwelsh 1,588]

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.

[Ringandpinion 1,713]

On 2/19/2021 at 2:48 PM, cwelsh said:

For diversified, I try to say $150,000.

Is the $150k a barely tolerable minimum that good cause problems or a good rational choice to start with?  The reason I ask is that the numbers you posted show zero wiggle room at 40k so I wonder if 50 is sufficient.  I'm sure after I have familiarized myself with this approach that I would have the answer, but I'm just now looking at "Anchor" so don't really have an opinion yet.

[TomT 3]

@cwelsh So expanding on the question above about trading this strategy in an IRA -- how much drag on the returns are there when the options have to be cash secured?  I'm assuming there must be members that trade this in a 401K or IRA but it seems like the model portfolio and performance pages are showing what this looks like in a regular margin account.  So when there is a market drawdown does this mean the IRA account holders wouldn't be able to use some of the strategies you've written about and implemented in 2020 to help catch the market upswing after a big drop?  I specifically refer to your article in April that went over 4 different options to utilize with Anchor if you wanted to participate in the upside.

[dgcarlson 0]

@cwelsh   

Hi Chris, I am a new member still trying to understand the total strategy. I started with the How To Start... topic, and have read almost everything in the forum. I cannot find a description of the "general rules" for rolling, or general maintenance rules of the portfolio positions. I understand when to roll, but it seems sometimes we roll the long puts to an expiry beyond the expiry of the long calls. Am I understanding that correctly? We roll the calls and puts with expiry independent of each other? When rolling long puts what is the guidance for choosing expiry? If this is available as a forum post, please redirect me to it. Thanks!

[luxmon 233]

 

@cwelsh ,

I'm not sure I've seen this specific question addressed.  Between my wife and I our employer tax deferred retirement accounts (403b/457b) have grown and have become a pain to manage, causing me to lose some sleep at times with the risk I'm carrying there.  It dawned on me and I think this is possible to use Anchor here. Could one buy an S&P equivalent index matching fund (like VIIIX or VFIAX) in those employer accounts, beta-weight that combined position against SPY and employ the anchor hedging gadgets in my IRA?

 

I think the ITM call could be synthetically made by buying a beta-weighted number of long puts at the same expiration and strike as the ITM call in the IRA.  I realize there would be no leverage but at that point I wouldn't really care as there would at least be protection in the aggregate of tax deferred accounts.

 

Would there be any other limitations, such as if anchor sells shorter duration calls against the long duration ITM call (where then I wouldn't have a long call in the IRA)?  If not I think it might work.  Let me know what you think or if I'm missing anything.

Thanks,

Tim   

 

Edited July 2, 2021 by luxmon
cleaned up some formatting

[LaughingGas 0]

what is the tax adjusted returns for this strategy ? i am in a high tax bracket, with the frequent trades and not being able to compound my earnings, due to tax payments, how much ahead of the index will I be ? 

 

do you have any projections from your prior performance how this would perform against a buy and hold approach after factor in the capital gains tax savings and effects of compounding? 

[cwelsh 1,588]

On 8/27/2021 at 9:21 PM, skalmadi said:

what is the tax adjusted returns for this strategy ? i am in a high tax bracket, with the frequent trades and not being able to compound my earnings, due to tax payments, how much ahead of the index will I be ? 

 

do you have any projections from your prior performance how this would perform against a buy and hold approach after factor in the capital gains tax savings and effects of compounding? 

I should make an entire thread on this.  The short answer is that it is more efficient than a normal high frequency trading, as we manage for long term capital gains, so higher income tax brackets hopefully won't matter as much.  The bad news is that it is not as TAX efficient as long term buy and hold.  However, any advisor will tell you managing for taxes is not the worlds smartest move.  For example, buying a tax free muni that pays 0.02% vs. buying a just as secure taxable bond paying 5% would be a dumb decision.  

 

That said, there are situations where we do "in year" rolls on the calls -- rarely for a profit though, and if it is, then the profit likely won't be large.  In-year rolls are almost always after a large market draw down.

 

Due to the frequency of this question when I've been out marketing the new fund, I put together the following spreadsheet (NOTE THIS IS NOT TAX ADVICE, it's merely my theoretical calculations, everyone's tax situation is different).

 

The chart assumes trading Anchor on SPY, which rolls every year vs. just holding SPY, and starting with a balance of $100,000.

 

 

Every December, the end of year balance was taken in the "Strategy" column, and long term capital gains were applied.  Granted this is a rough calculation, as the rolls don't happen on December 31, but it shows what I want it to fairly well.

 

The above is reality, but I have manipulated the series of returns, and here are the general conclusions:

 

1.  If the strategy performs as expected in large up markets, even paying taxes, you're better off;

2.  If the strategy performs as expected in large down markets, even paying taxes, you're better off (often significantly);

3.  If the strategy performs as expected in flat to smaller down markets, you are probably better off in SPY, but that's because the strategy under performs, NOT because of taxes (in that case, you'll actually have a taxable loss in both situations);

4.  In smaller up markets, you are better off in SPY.  

 

The Anchor strategy aims for market like returns with less volatility.  On a extended period of time that should lead to market outperformance, even including taxes.  However if we have a "lost decade" type market, where we see 5-10 years of market returns between 5% and -5% and also low volatility, we most certainly will underperform.  Provided of course that carries across everything we're diversified in.

 

If you're looking for a "simple" rule, if both SPY and Anchor returned exactly 10% for five years and then you exited both positions, SPY would be up about 48.8% and Anchor would be up 46.9%.  

 

(That's the difference in taking 10% per year and paying your 20% taxes every year and taking 10% per year and paying your 20% taxes at the end).  

 

Obviously if you don't EVER sell the position, the difference is more dramatic.

 

[termn8er 0]

This is a very interesting system/method.  However, in less I am missing something you are not using your margin efficiently as you could and thus could get even better returns.

The position set up you recommend includes a DITM call and slightly OTM put.  However this is synthetically the same as using an OTM Put and a slightly ITM call.  The big difference between the two is although the risk is the same, the cost (margin) required for your set up is 5 - 6 times greater than the cost of the synthetic alternative. I confirmed this with TOS as well as modeled it out.  So this is a big opportunity to trade this in a much smaller account as well as having much better results if you use the same amount of margin but use the OTM options.

Secondly, when comparing to buy and hold, you do need to consider that the SPY does have approximately a 5% annual dividend which of course you do not get when using the long term options.

 

[cwelsh 1,588]

4 minutes ago, termn8er said:

This is a very interesting system/method.  However, in less I am missing something you are not using your margin efficiently as you could and thus could get even better returns.

The position set up you recommend includes a DITM call and slightly OTM put.  However this is synthetically the same as using an OTM Put and a slightly ITM call.  The big difference between the two is although the risk is the same, the cost (margin) required for your set up is 5 - 6 times greater than the cost of the synthetic alternative. I confirmed this with TOS as well as modeled it out.  So this is a big opportunity to trade this in a much smaller account as well as having much better results if you use the same amount of margin but use the OTM options.

Secondly, when comparing to buy and hold, you do need to consider that the SPY does have approximately a 5% annual dividend which of course you do not get when using the long term options.

 

The strategy uses NO margin and you even have cash left over to control the synthetic leverage you are obtaining.

 

The current yield on SPY from dividends is 1.3% (not 5%), which is baked into the option prices (trust me, I've beat my head on the wall on arbitrage dividend capture strategies for years, those are really priced in.

[termn8er 0]

Chris, 

Thanks for the reply and clarifying the dividends as that's the number TOS gave me.  However on the margin side (I know you are not using margin leverage).

If I set up the basic position today using your method it would look as follows:

Long 1 16 Sep 22 call @ 255

Long 1 16 Sep 22 put @ 435  Total cost = $218.75

My suggestion is:

Long 1 16 Sep 22 put @ 255

Long 1 16 Sep 22 call @ 435 Total cost  = $37.51

While these might not be exactly what strikes you would pick the example still holds. The two positions are synthetically the same. However my approach would yield the same dollar returns but much higher % on capital.  Plus I can trade this which a much smaller account now.  Additionally since I am using so little capital compared to the original approach, I can buy closer to the money puts and still be way ahead of the game as far as capital in the trade and thus have much greater downside protection.

So what am I missing?

 

 

[Kim 8,072]

Using the same amount of cash on a smaller account means much higher leverage. Which means you will have much higher losses and drawdowns when the strategy works against you.

The amount of leverage is determined not by the cash used, but by the amount of the stock you control. 

For example, if you have 100k account and SPY is at $440, buying 4 contracts means you control $176k worth of SPY stock. If you use a smaller account because you can buy the same number of contracts using your synthetic position for less cash means much higher leverage and higher risk.

[termn8er 0]

So after thinking about this further I do understand what you mean by I'm using more leverage. With your trade you are risking about roughly 15% of the capital deployed where I'm risking 100% of the capital deployed. So based on that if I increase my size at all I am absolutely adding more risk to the trade. With that said again if somebody had a smaller account they would be risking a much higher percentage of it. However I still believe that my approach for the same size account as you recommend would be a better use of capital as I have roughly 18,000 that I can just keep in cash versus put in the trade

[Kim 8,072]

The risk on capital is not higher, but the risk on the whole account is.

The Anchor largest drawdown in 2020 was around 10%. So assuming $100k account, that would be around $10k loss. If it used your method, you would buy the same number of contracts but could use it in a $20k account. So your loss on the whole account would be 50% instead of 10%.

Yes, you could use it in the same account and have more cash. This maybe would be beneficial if you could get some risk free return on this cash. Otherwise it's really pretty useless.

[vasis 4]

Hi @Kim, @cwelsh, not sure why my post was deleted (probably, such information already shared), bu let me repeat my question. Did you make backtesting of Leveraged Anchor strategy over declining market 2000-2012? 

[Kim 8,072]

Our long term members know that we always post the most accurate and transparent numbers, bad and good. In some cases the numbers can be delayed by few days, but they always are posted.

April numbers are published now.

To put things in perspective, this is the Anchor performance since inception on Jan.1 2019 till Apr.30 2022:

Anchor:  up 98.7%, 22.9% CAGR
S$P 500: up 64.9%.
 

[Kim 8,072]

Anchor behaves exactly as designed. No strategy can outperform in all market conditions (except for Madoff maybe), but those who followed the strategy from the very beginning are still crashing the S&P 500 with less volatility.

[vasis 4]

Seems to me SPX weeklies appeared in 2005 and were introduced by CBOE. It should be enough to make backtesting over 2007-2010 declining market. Another approach might be price approximation using implied volatility + theoretical price (from Black Sholes or more advanced models) + price of monthlies. For me, Anchor scheme is quite expensive over high volatility downtrends market when the price of hedge is high. The backtesting will show - is it still more profitable than the index in the long run or not. 

[cwelsh 1,588]

On 6/30/2022 at 4:25 PM, vasis said:

Seems to me SPX weeklies appeared in 2005 and were introduced by CBOE. It should be enough to make backtesting over 2007-2010 declining market. Another approach might be price approximation using implied volatility + theoretical price (from Black Sholes or more advanced models) + price of monthlies. For me, Anchor scheme is quite expensive over high volatility downtrends market when the price of hedge is high. The backtesting will show - is it still more profitable than the index in the long run or not. 

It is much more profitable over the long run, with less risk, than index investing.  I don't index invest at all anymore -- virtually the entirety of my stock allocation (less a small amount I keep for opportunities and small account I trade SO in) is in Diversified Anchor.

 

Anchor normally performs much better in market drawdowns than has been seen in the first 15% of this market decline.  We dug into why, and the answer is easy -- this is EXTREMELY low volatility for a market drop of this size.  Normally when the market is down over 20% (as it is currently) you can expect VIX to be over 40, if not even higher.  We're currently in the 25 range.

 

This directly impacts Anchor as we have not been getting the bump on the long calls and long puts in value from the increase in volatility.  Because we didn't get that bump, we got to ride the market all the way down until we hit delta parity on the long put and call. I predicted that if this happened in a low vol environment, Anchor would stop seeing losses around 12.5% or so.  Unfortunatey that number is closer to 15%-17%.

 

HOWEVER, this last month has proven spectacular.  I don't have all the numbers in yet (still waiting on brokerage statements), but I had a client just make me price the EFA Anchor performance.  From May 1 to the present, EFA was down 8.7%, EFA Anchor was only down 2.1%.

 

We beat the "EFA Market" by over 6.5%. If we go down a bit more, we'll hit the point where we can increase leverage without increasing risk -- so we'd benefit more on the upside.

 

In fast crashes (like 2020), Anchor crushes the market (hedging plus volatility)

In large up markets (2019 and end of 2020) Anchor beats the market due to its leveraged

In slow down markets, Anchor pretty much tracks the market until the "max pain"point is reached, then it beats the market (this number, depending on a lot of factors should be between 15% and 20%).  In times of normal volatility during declines, it should be in the 10% to 12.5% range.  

In slow up markets, Anchor should match or slighlty lag the market (again depending on a large variety of factors).

In a slow SMALL decline, Anchor will lag the market.

There are a few other conditions where Anchor lags -- if you have a slow down sawtooth market, Anchor can REALLY underperform.  (market goes down 5% then up 4% then down 5% then up 4% etc, for six months or so).  The market could be flat to down 2% and Anchor could easily be down 10% or more.  (This market condition has never existed in the US for an extended period, but it has in some other markets, so I expect it to eventually happen).

 

But even if we lag 8% one year out of 10, are even 2 of 10, then beat it the other 7, we crush it over time -- all while remaining hedged with lower risk.

 

Sure, I wish we weren't down 17% on the year right now.  (Also due to us refusing to take a loss on the diagonal for too long, that hurt about 2%). I would be "happy" at -12.5% given this market.  And we have a great new staff member, Roy Revere, who is working on optimizing the diagonal rolls through all market conditions as well. There is always room for improvement --- but I'm still VERY happy with the strategy and will keep trading in my account.

[cwelsh 1,588]

On 6/30/2022 at 4:25 PM, vasis said:

Seems to me SPX weeklies appeared in 2005 and were introduced by CBOE. It should be enough to make backtesting over 2007-2010 declining market. Another approach might be price approximation using implied volatility + theoretical price (from Black Sholes or more advanced models) + price of monthlies. For me, Anchor scheme is quite expensive over high volatility downtrends market when the price of hedge is high. The backtesting will show - is it still more profitable than the index in the long run or not. 

Do you know where/how to get the SPX weekly data with intraday time stamps or where?  The oldest data I have for weeklies is back through 2012.   And yes, I've tested Anchor going back that far.

 

I also did a "light" test with monthlies going back to 2007.  The diagonal piece doesn't work, but the rest of the trade does.  If we assume (as held for 2012-present) you on average pay for 80% (just a bit higher) of the cost of the hedge each year from the diagonal, then you can "assume" performance going back to 2007.  And Anchor did great through 2007-2011 as well.

[vasis 4]

Hi Jesse,

First of all, thank you for so detailed answer. I just pinged CBOE history market data department to share quotes (if any) for weekly options started from 2005. All that you explained makes sense to me, one question - what is the maximum drawdown you saw in your backtesting, and how far it was from the index (better/worse)? You mentioned that your folks are trying to optimize diagonal hedging: do you have any targets what exactly should be improved (total cost of hedging, max drawdown)?

If Anchors really beat the market in the long run (15-20+ years) it means that options pricing is wrong and close legs cost more than it should. Do you think such inefficiencies may exist for a long time? 

[Vkleniko 29]

@cwelsh - I am not a Anchor subscriber yet. Is there a discussion of the 2022 notable Anchor underperformance vs SPY in one of the forums? Really intrigued with the Long Term power of the strategy, but would be curious to understand what transpired in 2022 specifically. Thank you.

[Kim 8,072]

1 hour ago, Vkleniko said:

@cwelsh - I am not a Anchor subscriber yet. Is there a discussion of the 2022 notable Anchor underperformance vs SPY in one of the forums? Really intrigued with the Long Term power of the strategy, but would be curious to understand what transpired in 2022 specifically. Thank you.

I will let Chris to comment specifically on 2022, but as a general note, Anchor delivered 20% CAGR since inception compared to less than 15% SPY CAGR. This is a massive overperformance, and this is what's important. I don't think it's realistic to expect from any strategy to overperform 100% of the time. 

[Vkleniko 29]

39 minutes ago, Kim said:

I will let Chris to comment specifically on 2022, but as a general note, Anchor delivered 20% CAGR since inception compared to less than 15% SPY CAGR. This is a massive overperformance, and this is what's important. I don't think it's realistic to expect from any strategy to overperform 100% of the time. 

Agreed, Kim. Just looking for a post mortem / insight into what had hurt the strategy so badly (28% down for Anchor vs. 18% down for SPY) in 22, and the group's learnings from it.

[Vkleniko 29]

I looked at and acknowledge the overall picture around this strategy. Am specifically curuous about the one year where almost a third of a model portfolio went up in smoke with a massive 1000bps lag to the market to boot, especially given the donwside protection emphasis in the strategy thesis . I think it is a fair due diligence question. There had to be a discussion, so I am looking for a link to it. Appreciate the patience with me. 

[Kim 8,072]

I'm pretty sure that most fund managers would be very happy with 20% CAGR and 28% drawdown.. 

There is no reward without risk.

Charlie Munger said: "If You Can't Stomach 50% Declines in Your Investment You Will Get the Mediocre Returns You Deserve".

That said, I remember Chris mentioned that considering the magnitude of the market decline, IV did not spike enough - VIX spent most of the year in the mid 20 and spiked only for short periods of time to low/mid 30s. This means that long puts did not increase in value enough to provide adequate protection. If you also consider that this is a leveraged strategy, this can definitely explain the underperformance of this single year. 

Members who were with Leveraged Anchor from inception in 2019 were still up 78% even after the drawdown.

[Kim 8,072]

26 minutes ago, Mattatut said:

Nobody has answered his question. It isn’t an absurd question. 

I know members who cancelled their Anchor subscription in 2022, just in time to miss the remarkable recovery.. Sell low buy high?

[Vkleniko 29]

56 minutes ago, Kim said:

I'm pretty sure that most fund managers would be very happy with 20% CAGR and 28% drawdown.. 

There is no reward without risk.

Charlie Munger said: "If You Can't Stomach 50% Declines in Your Investment You Will Get the Mediocre Returns You Deserve".

That said, I remember Chris mentioned that considering the magnitude of the market decline, IV did not spike enough - VIX spent most of the year in the mid 20 and spiked only for short periods of time to low/mid 30s. This means that long puts did not increase in value enough to provide adequate protection. If you also consider that this is a leveraged strategy, this can definitely explain the underperformance of this single year. 

Members who were with Leveraged Anchor from inception in 2019 were still up 78% even after the drawdown.

@Kim - really appreciate the color! Makes sense intuitively. Does the published rerurns table for Anchor show the numbers for its Levered version or the Regular? The CAGR says 20% for Levered, but the main table heading refers to "Anchor", without a qualifier. 

Were there any strategy adjustments made, esp. around the hedge constriction coming out of 2022?

 

 

 

 

 

 

 

.

[greenspan76 345]

1 hour ago, Mattatut said:

Nobody has answered his question. It isn’t an absurd question. 

I don’t recall a specific discussion on the forum about this and am not really bothered too much by one year’s result since this is intended to be a long-term strategy, but my own personal analysis was this:

1) the market whipsawed enough to yield near-worst case results, and
2) the  puts underperformed expectations, despite market conditions.

On my trade, I know there were 3-4 times that the short puts from the diagonal nearly reached their target gain to roll, but the market quickly reversed and they turned into a large loss, so that alone was probably 5% loss on account just due to poor timing/random noise.
 

Lastly, I personally concluded that it was better to roll up the longs of the diagonal more frequently to avoid a large spread in the long and short. I believe this was discussed briefly somewhere in the forum.

[Vkleniko 29]

43 minutes ago, greenspan76 said:

I don’t recall a specific discussion on the forum about this and am not really bothered too much by one year’s result since this is intended to be a long-term strategy, but my own personal analysis was this:

1) the market whipsawed enough to yield near-worst case results, and
2) the  puts underperformed expectations, despite market conditions.

On my trade, I know there were 3-4 times that the short puts from the diagonal nearly reached their target gain to roll, but the market quickly reversed and they turned into a large loss, so that alone was probably 5% loss on account just due to poor timing/random noise.
 

Lastly, I personally concluded that it was better to roll up the longs of the diagonal more frequently to avoid a large spread in the long and short. I believe this was discussed briefly somewhere in the forum.

Thank you for sharing the recollections @greenspan76. Must have been a tumultuous year to go through and to keep the faith in the midst of a painful drawdown. 

[Kim 8,072]

9 hours ago, Vkleniko said:

@Kim - really appreciate the color! Makes sense intuitively. Does the published rerurns table for Anchor show the numbers for its Levered version or the Regular? The CAGR says 20% for Levered, but the main table heading refers to "Anchor", without a qualifier. 

Were there any strategy adjustments made, esp. around the hedge constriction coming out of 2022?

.

It's leveraged Anchor since 2019. 

I believe Chris is looking to tweak the strategy all the time, and @greenspan76 provided a pretty good explanation for 2022.

btw, I recommend reading How Anchor Survived the 2020 Crash. On March 19 2020, SPY at 234 (down 30%), Anchor UP $5k (~3%).

[cwelsh 1,588]

22 hours ago, SBatch said:

Identifying one year, while ignoring the rest seems odd to me. The CAGR since inception far outperforms the S&P, so one underperforming year would not lead to lessons being learned.

Still a post-mortem, on a year where we under performed, is reasonable.

 

The short answer is pretty simple:

 

1.  We hedge on average 5% out of the money and this costs 7% (with zero leverage);

2.  So in theory you cannot be down more than 12% on a year -- cost of hedge plus out of the money.

3.  We did worse -- why?

4.  Two primary reasons.  First, we also have the diagonal that pays for the hedge.  Ideally we have the 100 put and are selling 99 puts against it -- so even if market swings dramatically, worse case is we keep rolling that 99 put and make $0.  In reality we can get skewed a bit as the market goes up -- we have the 100 long put and are now selling 104 puts against it -- that can be a loss of $4.  This happened --- but that might get us from -12% to -15% -- how did we do so much worse?

5.  Well we saw something that had never occurred before across the market -- the market dropped over 15% (over 20% actually) AND volatility went down.  Given we always planned for a gain from volatility when the prices crater, this hurt us, as we were under hedged AND the value of the long puts on our diagonal dropped by more than expected. 

6.  We had to roll the position in year, which always cost money.

 

4+5+6 = under performance

 

The biggest factor was the drop in volatility along with the market drop.  

 

In Soteria Fund we solved the loss on the diagonal by changing they way we pay for the hedge -- but it's one that you need several million dollars in an account to do AND one that has margin available.  (Another reason I love the fund).  For instance, one thing we do is get much higher returns on our excess cash.  Thy way the math currently works is, on a $1m account, I can get 1.6 to 1.8x leverage (about what I want) for only putting $500,000 out the door.  I can then make 10% on that other $500,000 -- or $50,000.

 

At 1.5x, the cost to the portfolio for the hedge is 9%.  Well just that cash trade made 5% back -- so now the cost of hedging is down to 4%.  The other way we pay yields 5% with MUCH lower risk than the diagonal.

 

As for the diagonal on the site and in managed accounts, we try not to get the short positions as much above the long strike as we did before AND we don't view the drop in volatility in a market crash likely again (though it can happen).  Further, the cost of hedging is down significantly, which means instead of hedging 5% out of the money, our most recent roll was more at the money -- so more protection.

 

 

I don't see us losing as much on the diagonal as we did moving forward.  I don't see the declining vol in a crash happening again.  And we have a better hedge in.

 

Ideally that helps avoid a year that bad.  

 

But as noted, in the long run, we're still SIGNIFICANTLY better.  Having a down year that basically matched what the market did isn't ideal -- but if we beat in up years and match in down years, that's a way better long term result.  If we can beat in up years AND not be as bad in down years --- well then we get back to liking the trade even more,

 

As always, use leverage at your own risk and know down years are OF COURSE possible -- all investments carry risk.

[Vkleniko 29]

Thank you, Chris. Exactly the analysis i was looking for!

 

[cjdinno 0]

@cwelsh

I've recently joined Anchor Trades and I wanted to know what would be the setup if I was to start an Anchor Trades portfolio now. FWIW I was a member a few years ago, and it was impacted by COVID, so I never really got going.

Is there a model portfolio running now? If so could you point me in the right direction to the latest trade report.

Looking forward with anticipation.

Thanks, Chris

 

Edited November 5, 2024 by cjdinno

[greenspan76 345]

3 hours ago, cjdinno said:

@cwelsh

I've recently joined Anchor Trades and I wanted to know what would be the setup if I was to start an Anchor Trades portfolio now. FWIW I was a member a few years ago, and it was impacted by COVID, so I never really got going.

Is there a model portfolio running now? If so could you point me in the right direction to the latest trade report.

Looking forward with anticipation.

Thanks, Chris

 

How to get started:
https://steadyoptions.com/forums/forum/topic/7144-how-to-start-a-leveraged-anchor-portfolio/
(jump to a member's recent summary of the "rules": https://steadyoptions.com/forums/forum/topic/7144-how-to-start-a-leveraged-anchor-portfolio/?do=findComment&comment=203589)

 

Current portfolio (updated 10/9/24):
https://steadyoptions.com/forums/forum/topic/9891-anchor-current-portfolio/ (missing one update - see link below)
(transactions since 10/9/24 not yet showing on Current Portfolio: https://steadyoptions.com/forums/forum/topic/4564-spy-portfolio-and-roll/?do=findComment&comment=203058)

 

Possible new model portfolio today:
I can't give you advice, but if I were starting a portfolio right now with $100k, it would look similar to this:

 

Notes:

• This is based on midpoint pricing as of a few minutes before this post with SPY at about 575.80
• The commission is about what I typically would pay
• I chose roughly 95 delta long calls and the "rules" say 90-95 delta
• I chose to hedge 5% out of the money, but hedging is cheap enough you could justify an at the money hedge right now
• I don't think its crazy to only have 1 diagonal with this setup instead of 2, but I would personally chose 2.

Edited November 5, 2024 by greenspan76

[jp1 0]

Is there an update to this strategy? Before I join the paid service I'm interested to know how it behave during Aug 2024 and this year? Is it in a drawdown currently?

[Kim 8,072]

1 hour ago, jp1 said:

Is there an update to this strategy? Before I join the paid service I'm interested to know how it behave during Aug 2024 and this year? Is it in a drawdown currently?

All performance numbers are on the performance page. 20.1% CAGR since inception, beating the S&P by significant margin.

[jp1 0]

5 hours ago, Kim said:

All performance numbers are on the performance page. 20.1% CAGR since inception, beating the S&P by significant margin.

Thanks. What about recent performance in current market environment?

[trhanson 622]

50 minutes ago, jp1 said:

Thanks. What about recent performance in current market environment?

On the "liberation day" crash, we just barely missed what I would have considered to be our roll point for the hedges.  On that day, S&P was down about 17% and my portfolio was down about 10%.  We didn't quite hit the roll point, so now we've sort of inverted with the S&P being down about 6% while my portfolio is down about 11%.  But if we continue to recover, portfolio should recover faster here.  If we retest lows, we should be able to roll this time and lock in being ahead.  If we just float right here, we should be able to make pretty good premium on our diagonals, but I would assume we would lag the market a bit.

 

Had the price of SPY dropped about another $10, we likely would have rolled our hedges and been up.  Sometimes we just don't quite hit the break point though.  

[Kim 8,072]

As a side note, we encourage people to look at the big picture and not focus on the last few weeks.

Anchor is has been CRASHING the S&P 500 since inception, up 223.3%, compared to S&P 500 return of 134.7% (as of 12/31/2024).

We also recommend reading How Anchor Survived the 2020 Crash. On March 19 2020, SPY at 234 (down 30%), Anchor UP $5k (~3%). 

[cwelsh 1,588]

And I would also encourage everyone to look at a year to year basis -- not a month to month, just because of how the strategy works.  The hedges have to both kick in and be paid for.

 

The "worst" case for the strategy is about a 7% SPY drawdown right after opening a new year strategy.  At that point you've not paid for the hedge at all, plus you've lost some on the diagonal, and as the hedge doesn't really start until a 5% drawdown, then you haven't gotten the advantage of having it.  

 

On a 12 month rolling basis, it works great (except for one period due to an odd mix of market crash plus volatility dropping, but we did address that).  

 

Anchor ideally outperforms in up markets (those up over 10%) and in crashes (over 15% to 20%).  In flat markets (5% to -5%) we EXPECT to underperform.  In small down markets (-5% to -10%) it's a tossup depending on a lot of factors if we outperform or over perform.  

 

(Past performance does not always indicate future performance)

[Kim 8,072]

Very sounds advice Chris.

And it should apply to all strategies, not just Anchor. Unfortunately, some "investors" think in terms of weeks and months instead of years and decades. No wonder that 90% of investors lose money in the stock market.

P.S. Anchor was up 4.1% in April vs. SPY down 0.91%. Anchor is down 4.6% as of April 30, matching SPY performance more or less. But in 2024 Anchor was up 37.8% compared to SPY up 23.3%.