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Jesse

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We are pleased to introduce an addition to Steady Options offerings. Steady Momentum is for long term investors who want to apply the concepts of momentum to their ETF and options portfolios.

 

What is Steady Momentum?

 

Steady Momentum includes two separate trading strategies that subscribers can follow:

  1. Collateralized put trade alerts on both the S&P 500 and MSCI EAFE indices. These underlying indices represent the majority of the global equity market, and provide substantial option market liquidity. When momentum signals indicate a change in trend for each underlying index, simple risk-management adjustments will be made to move trades further out of the money until upward trend signals resume. Performance tracking will be based on a hypothetical $100,000 account, although subscribers could allocate much less. A single cash secured EFA contract would only currently require around $6,300.
     
  2. ETF trade alerts producing a low-turnover multi-factor globally diversified portfolio that may be suitable for long-term portfolios. Potential portfolio adjustments occur on a monthly basis, and subscribers could allocate basically any dollar amount. 

 

What's the goal?

 

Cash secured put writing has been shown to historically provide returns similar to the underlying asset, yet with less volatility and drawdown. We contend that over time the strategy must work, otherwise it implies that stock market insurance would be available for free. The goal for the put write alerts is to produce higher risk-adjusted returns than the underlying S&P 500, Russell 2000 and MSCI EAFE indices, and higher absolute returns than the strategy benchmark, PUTW (Wisdom Tree CBOE S&P 500 PutWrite Strategy Fund). Risk adjusted performance measurements like the Sharpe Ratio take into account both returns and volatility. 

 

The goal for the ETF alerts is to produce both higher risk-adjusted and absolute returns than the strategy benchmark, which is 80% VT (Vanguard World Stock ETF) and 20% AGG (iShares Core US Aggregate Bond ETF). Both the option and ETF strategies will be available to those interested in a professionally managed account. 

 

Both strategies are simple to follow and very low maintenance, making it easy for subscribers to replicate results. Put contracts will be collateralized by low risk fixed income ETF's. Skillful execution of limit orders will have little to no impact on subscriber success. If you're looking for constant action and high risk/reward trades, this service isn't for you. Some option selling services attempt to make in a month what our put selling approach is expected to make in a year. 

 

Trading Instruments

 

Short put alerts: XSP, IWM, and EFA

Benchmark: PUTW (Wisdom Tree CBOE S&P 500 PutWrite Strategy Fund) 

ETF alerts: IVV, VEU, AGG, SLYV, DLS, VWO, DGS

Benchmark: 80% VT, 20% AGG


Performance expectations


To get an idea of historical performance of writing S&P 500 puts, we can look at and build upon the CBOE S&P 500 PutWrite Index (PUT):

 

From 1986-2018, the below chart illustrates PUT (portfolio 1) compared to the S&P 500 total return index. 

1.png

 

Additionally, we can backtest approximately how the method used in our putwrite alerts would have compared to both of these indices (portfolio 2).

2.png

Past performance doesn't guarantee future results, and please see this article for additional discussion on why future results may be lower.  

It is important to maintain realistic expectations, compared to our higher risk higher reward strategies like Steady Options. Please make sure you understand the performance goals before subscribing.


What is our edge

We are planning to use the following techniques to beat the PUTW benchmark:

  1. Use momentum to inform our strike selection. When momentum signals are negative, farther OTM strikes will be used to increase our margin of safety.
  2. Actively manage the positions by closing/rolling them prior to expiration when the majority of potential profits have been earned. The benchmark index assumes all trades are held until expiration.
  3. Use low risk ETFs as collateral instead of Treasury bills/money market.
  4. Diversify across Large Cap, Small Cap, and International indices. 


Portfolio size

The model portfolio is based on a $100k account. If you want to trade with less, you'll either need to exclude a symbol (XSP is the largest notional), or take more risk by using more leverage. You could also spread off the trades to reduce exposure (a put credit spread). For example, 1 EFA contract is about $6,000 of notional exposure. If someone had a $10,000 account, they could trade 2 EFA contracts and have a similar 1.25X exposure as our model portfolio. Of course performance would differ since XSP and IWM would not be included. And accounts anywhere in between will just need to make a trader's choice on how to allocate based on their account size and risk tolerance.

 

Management Style

 

Systematic. All alerts will be submitted based on pre-defined quantitative rules. Subscribers certainly can execute alerts based on their own discretion and risk tolerance, but I will not be providing personalized advice on the forums.  

 

Managed Accounts

 

Lorintine Capital is a Registered Investment Advisor providing managed accounts based on the Steady Momentum alerts. Contact myself or Chris Welsh if you are interested in further details.

 

Additional Related Reading

 

Combining Momentum and Put Selling

Trend Following: An 88 Year Look at the S&P 500

The Scientific Process of Increasing Expected Returns

Please refer to Frequently Asked Questions for more information.

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Equity index put writing: A strategy for uncertain markets

 

“Over the past 25 years, the CBOE S&P 500 PutWrite Index (PUT) has outperformed the S&P 500 index, with lower volatility and better risk-adjusted returns."

"Index option premiums areeligible for favorable tax treatment (IRS Section 1256: 60% long term /40% short term).”

 

E63AEC54-1B90-498A-B0F1-A2AFC2E43E9F.jpeg

 

“For investors concerned about uncertain markets, collateralized equity index put writing has the potential to seek to improve the risk-return efficiency, liquidity, flexibility and cost-effectiveness of investment portfolios without compromising the potential for equity-like returns over the long run. Simply stated, a put write strategy is designed to allow investors to maintain their participation in the market that may still have potential for expansion, but with the goal of pursuing less volatility and less drawdown risk than broader equity markets.”

 
 

 

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1 hour ago, blackgold said:

For Portfolio 1 and 2 is there a way to get the returns on a yearly or even monthly time frame going back to 1987?

Portfolio 1 is CBOE PUT. That data is available on their website: http://www.cboe.com/products/strategy-benchmark-indexes/putwrite-indexes/cboe-s-p-500-putwrite-index-put 

 

The method of constructing portfolio 2 is described in the discussion topic for members: https://steadyoptions.com/forums/forum/topic/5227-discussion-put-write-portfolio/?do=findComment&comment=119570 

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On 2/6/2019 at 4:38 PM, Jesse said:

We are pleased to introduce an addition to Steady Options offerings. Steady Momentum is for long term investors who want to apply the concepts of momentum to their ETF and options portfolios.

 

What is Steady Momentum?

 

Steady Momentum includes two separate trading strategies that subscribers can follow:

  1. Collateralized put trade alerts on both the S&P 500 and MSCI EAFE indices. These underlying indices represent the majority of the global equity market, and provide substantial option market liquidity. When momentum signals indicate a change in trend for each underlying index, simple risk-management adjustments will be made to move trades further out of the money until upward trend signals resume. Performance tracking will be based on a hypothetical $100,000 account, although subscribers could allocate much less. A single cash secured EFA contract would only currently require around $6,300.
     
  2. ETF trade alerts producing a low-turnover multi-factor globally diversified portfolio that may be suitable for long-term portfolios. Potential portfolio adjustments occur on a monthly basis, and subscribers could allocate basically any dollar amount. 

 

What's the goal?

 

Cash secured put writing has been shown to historically provide returns similar to the underlying asset, yet with less volatility and drawdown. We contend that over time the strategy must work, otherwise it implies that stock market insurance would be available for free. The goal for the put write alerts is to produce higher risk-adjusted returns than the underlying S&P 500, Russell 2000 and MSCI EAFE indices, and higher absolute returns than the strategy benchmark, PUTW (Wisdom Tree CBOE S&P 500 PutWrite Strategy Fund). Risk adjusted performance measurements like the Sharpe Ratio take into account both returns and volatility. 

 

The goal for the ETF alerts is to produce both higher risk-adjusted and absolute returns than the strategy benchmark, which is 80% VT (Vanguard World Stock ETF) and 20% AGG (iShares Core US Aggregate Bond ETF). Both the option and ETF strategies will be available to those interested in a professionally managed account. 

 

Both strategies are simple to follow and very low maintenance, making it easy for subscribers to replicate results. Put contracts will be collateralized by low risk fixed income ETF's. Skillful execution of limit orders will have little to no impact on subscriber success. If you're looking for constant action and high risk/reward trades, this service isn't for you. Some option selling services attempt to make in a month what our put selling approach is expected to make in a year. 

 

Trading Instruments

 

Short put alerts: XSP, IWM, and EFA

Benchmark: PUTW (Wisdom Tree CBOE S&P 500 PutWrite Strategy Fund) 

ETF alerts: IVV, VEU, AGG, SLYV, DLS, VWO, DGS

Benchmark: 80% VT, 20% AGG


Performance expectations


To get an idea of historical performance of writing S&P 500 puts, we can look at and build upon the CBOE S&P 500 PutWrite Index (PUT):

 

From 1986-2018, the below chart illustrates PUT (portfolio 1) compared to the S&P 500 total return index. 

1.png

 

Additionally, we can backtest approximately how the method used in our putwrite alerts would have compared to both of these indices (portfolio 2).

2.png

Past performance doesn't guarantee future results, and please see this article for additional discussion on why future results may be lower.  

It is important to maintain realistic expectations, compared to our higher risk higher reward strategies like Steady Options. Please make sure you understand the performance goals before subscribing.


What is our edge

We are planning to use the following techniques to beat the PUTW benchmark:

  1. Use momentum to inform our strike selection. When momentum signals are negative, farther OTM strikes will be used to increase our margin of safety.
  2. Actively manage the positions by closing/rolling them prior to expiration when the majority of potential profits have been earned. The benchmark index assumes all trades are held until expiration.
  3. Use low risk ETFs as collateral instead of Treasury bills/money market.
  4. Diversify across Large Cap, Small Cap, and International indices. 


Portfolio size

The model portfolio is based on a $100k account. If you want to trade with less, you'll either need to exclude a symbol (XSP is the largest notional), or take more risk by using more leverage. You could also spread off the trades to reduce exposure (a put credit spread). For example, 1 EFA contract is about $6,000 of notional exposure. If someone had a $10,000 account, they could trade 2 EFA contracts and have a similar 1.25X exposure as our model portfolio. Of course performance would differ since XSP and IWM would not be included. And accounts anywhere in between will just need to make a trader's choice on how to allocate based on their account size and risk tolerance.

 

Management Style

 

Systematic. All alerts will be submitted based on pre-defined quantitative rules. Subscribers certainly can execute alerts based on their own discretion and risk tolerance, but I will not be providing personalized advice on the forums.  

 

Managed Accounts

 

Lorintine Capital is a Registered Investment Advisor providing managed accounts based on the Steady Momentum alerts. Contact myself or Chris Welsh if you are interested in further details.

 

Additional Related Reading

 

Combining Momentum and Put Selling

Trend Following: An 88 Year Look at the S&P 500

The Scientific Process of Increasing Expected Returns

Please refer to Frequently Asked Questions for more information.

Would you recommend combining leveraged anchor and steady momentum in a portfolio or are they too similar beeing based on etf index fonds?

Did you backtest using low correlation etfs for less drawdowns?

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7 hours ago, urfiend said:

Would you recommend combining leveraged anchor and steady momentum in a portfolio or are they too similar beeing based on etf index fonds?

Did you backtest using low correlation etfs for less drawdowns?

 

The Steady Momentum and Anchor strategies are different in several ways, so combining them to diversify your portfolio is smart. The SM put write strategy includes exposure to 5 different underlying ETF's that encompass both equity and fixed income asset classes.

 

I'd recommend also reading the following article if you haven't already:  Equity Index Put Writing For The Long Run

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7 minutes ago, Tamas said:

@Jesse What do you think EEM and EUN2 are a good canditate to put write strategy?

 

Yes, EEM was added to the strategy this year. It's a good product for put writing, and rounds out a global asset allocation for our strategy. 

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On 5/15/2020 at 4:32 PM, Jesse said:

 

Yes, EEM was added to the strategy this year. It's a good product for put writing, and rounds out a global asset allocation for our strategy. 

Thanks @Jesse. So, If I would like to start SM put write strategy and I have $10.000 -$15.000 for this strategy, it could works because I can trade 1 EFA and 2 EEM contracts ( ~ $5.500 + $7.200 = $12.700 ). And this allocation give me a little diversifications. Is that correct?

Edited by Tamas

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Hi @Jesse

I am finding SM strategy of interest. I have the following questions so I can understand it better:

1) I read there is a need of minimum 100K. Is this still true? I see your response above on this thread that this can be even done using 15K. Would I see same performance as if 100K?

2) Are there any limitations for scaling on this strategy? Would there be issues if trading $1 Million account? How about $1 Billion account?

3) @Kim had mentioned in another thread that this strategy does not do well when there is a 10% drop in the market and then 10% back rise in the market. Can you explain this in more details?

4) Is there a good time or a bad time to start using this strategy? I mean most Indices dropped around 40-45% in last 2 months and then came back up like 50% of the dive. Does this impact timings for starting to use it?

Edited by yalgaar

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16 hours ago, yalgaar said:

Hi @Jesse

I am finding SM strategy of interest. I have the following questions so I can understand it better:

1) I read there is a need of minimum 100K. Is this still true? I see your response above on this thread that this can be even done using 15K. Would I see same performance as if 100K?

2) Are there any limitations for scaling on this strategy? Would there be issues if trading $1 Million account? How about $1 Billion account?

3) @Kim had mentioned in another thread that this strategy does not do well when there is a 10% drop in the market and then 10% back rise in the market. Can you explain this in more details?

4) Is there a good time or a bad time to start using this strategy? I mean most Indices dropped around 40-45% in last 2 months and then came back up like 50% of the dive. Does this impact timings for starting to use it?

 

1: You can trade with less, but you will then either have to exclude certain underlyings or use more leverage as a result of a smaller account size. For this reason, your performance will differ.

 

2: No. If you have a larger account you can reach out to me about a managed account as well.

 

3: There's many different variables that impact performance so it's difficult to say with any certainty what outcomes might be given a certain market event on a single underlying asset. The performance of selling out of the money puts is impacted by both the speed and depth of a market decline, as well as if contracts need to be rolled during the period. 

 

4: It's always a good time to start using the strategy if you're going to define success over a multi-year time horizon. What we do see in the past is that put writing tends to produce above average returns after periods where the stock market has dropped and volatility has become elevated. 

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To give an example regarding question #3:

lets assume for simplicity that you sell ATM puts (like S&P 500 PutWrite Index PUT).

Say you sold the puts ATM and got say 1.5% credit (sold 300 puts for $4.5). The exact amount will depend mostly on IV, so this is just an example.

Now lets say the market goes up 10%. Your gain on the sold puts is limited to the credit you got which is 1.5%. so you closed them and sold 330 puts for the same 1.5% credit.

Now next month the market goes down 10%. Your puts will lose 10% (as measured against the stock price) less 1.5% credit, so 8.5% total.

Your total loss on the puts is 7.0%, while the market is at zero (more or less).

This is what I meant by "you will catch all the losses in a down move, but only small part of the gain in the up move. "

Of course this is an extreme example, and with better management, you get better results, but this is one of the drawdowns of this strategy. If the markets were moving in a smooth matter (like 1-2% up or down each month), this would be a holy grail of investing - but we know the reality is more complicated. Still, over a long term this strategy proved to outperform the market with less volatility.

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@Kim, @Jesse What do you think about the "hold the strike" concept (Reel Ken's strategy)? Maybe the drawdown is larger? Maybe only stronger bull market performs fine and in the bear market will be underperfoms the ATM put writing strategy? On the other hand we could get more upward intrinsic value and we could regain a lot of dollars in intrinsic.

What is your opinion about it?

Edited by Tamas

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