Anchor Trade Performance

[yalgaar 40]

I was just looking at the Anchor Trade performance and comparing it with SPX performance. Seems like SPX has performed better almost every single year. It also has performed better on an Average for the last 10 years. Can someone explain why would one want to trade the anchor strategy as opposed to just invest in SPX? 

 

For reference:

 

 

 

 

Edited July 7, 2020 by yalgaar

[Kim 7,943]

Because Anchor provides you protection. In 2020 when SPX was down 30%+ Anchor was flat, actually slightly up at some point.

Before we switched to Leveraged Anchor, it was lagging the SPX by 2-3% per year on average due to some structural issues. Most members were still very happy to accept a small lag during strong bull markets, knowing that they are protected during the bear markets.

Since we switched to Leveraged Anchor in 2019, the strategy actually outperformed the SPX in one of its best years, and still provided excellent protection during the 2020 bear market.

More details and reading:

https://steadyoptions.com/search/?tags=anchor trades&sortby=newest&page=1

To avoid further confusion, I'm going to move the historical Anchor performance to Discontinued Strategies.

[yalgaar 40]

Thanks Kim for your super quick reply on the topic. 

The leveraged anchor implemented since 2019 sure seems to have outperformed SPX performance. It has also done very well in 2020 like you mentioned. I will check out the links you have sent me.

[cwelsh 1,549]

Kim was on this before me -- but the way Regular Anchor was designed, it was ALWAYS going to lag the index -- because it wasn't fully invested. Our SPY position was only between 75%-90% of the portfolio, the rest was a hedge.  In other words, if the strategy performed PERFECTLY, we'd still lag 10%-25%, which is why we moved to the leveraged version -- to eliminate that gap.

[yalgaar 40]

Thanks @Kim & @cwelsh

I am considering to invest in the Anchor Strategy and still have the following questions:

1) Which broker do you recommend for this strategy?

2) Just so I understand the dynamics of this strategy I also would like to understand what kind of ROI is expected for the following scenarios.

a) SPY performed 25% annually.

b) SPY performed 50% annually.

c) SPY performed 5% annually

d) SPY performed 10% annually.

 

e) SPY lost 25% annually.

f) SPY lost 50% annually.

g) SPY lost 5% annually

h) SPY lost 10% annually.

 

3) I have read too much information about this and find myself in information overload mode at this point. I was a bit confused about minimum funds for this strategy. I read somewhere around 50K, but I have also read 100K.....as well as like 140K to be fully diversified. Can you please explain the differences?

4) Is there a good time or not so good time to invest in this strategy? I am concerned if this is the worst time to invest?

 

[Kim 7,943]

1. Commissions and execution are still important, but Anchor trades are very low commissions strategy, so it's less critical than SO strategy. 
 

2. The following table is copied from Leveraged Anchor Implementation which was in the list I linked to. In live trading, it actually outperformed expectations, but of course there is no guarantee it will continue, so this is just an approximate estimate. 
 

3. The model portfolio is 100k. You can do it with 50-60k, but it will be less gradual in terms of exact leverage. 140k is more appropriate if you want to implement more indexes like QQQ, IWM and EFA.
 

4. It's obviously better to start when VIX is in the mid teens because options you buy are less expensive. The risk to start now is that you pay more for the hedge, but then IV goes down quickly and you don't get enough premium from the sold puts to pay for the hedge. In this case the strategy will probably underperform if there is a strong rally. But you are still protected. Personally this is a risk I would be willing to take, but everyone is different.

[cwelsh 1,549]

14 hours ago, yalgaar said:

Thanks @Kim & @cwelsh

I am considering to invest in the Anchor Strategy and still have the following questions:

1) Which broker do you recommend for this strategy?

2) Just so I understand the dynamics of this strategy I also would like to understand what kind of ROI is expected for the following scenarios.

a) SPY performed 25% annually.

b) SPY performed 50% annually.

c) SPY performed 5% annually

d) SPY performed 10% annually.

 

e) SPY lost 25% annually.

f) SPY lost 50% annually.

g) SPY lost 5% annually

h) SPY lost 10% annually.

 

3) I have read too much information about this and find myself in information overload mode at this point. I was a bit confused about minimum funds for this strategy. I read somewhere around 50K, but I have also read 100K.....as well as like 140K to be fully diversified. Can you please explain the differences?

4) Is there a good time or not so good time to invest in this strategy? I am concerned if this is the worst time to invest?

 

1.  We can't recommend a broker.  I know members use TD Ameritrade, Tasty Trade, Interactive Brokers, and others, but we don't recommend a particular one.  

2.  It's hard to predict on absolute numbers like that because with Anchor it depends on how it got there.  For instance, in your first scenario, if SPY increased by 25% at a steady rate of 2.5%, the strategy will absolutely crush the return of the index.  You'll gain more than 25% from the leverage and probably make well more than needed on paying for the hedge.  However, if you go up 15% in a month, resulting in rolling the hedge up immediately, then slowly lose 1-2% per month for six months (thus losing consistently on your shorts), then having a 20% jump in a month to get you to your up 25%, you may end up lagging a bit.  You'd still be up on the year, but probably not 25%.  

 

Generally in "smooth" up markets, this strategy is going to greatly outperform.  In fast down markets its going to greatly outperform.  "The worst" situation is choppy performance between +5% to -5%.

 

3.  It's really hard to implement the strategy with less than $50k.  That's simply because 3 contracts gets you close to that level.  With $100k you can get a pretty good split on the short/long position.  (So 7 long contracts and 3 short or whatever the math works out to be at the present moment).  Once you get to the $140k or higher level, you can start looking at using the Diversified Leveraged Anchor (so adding in EFA, IWM, and/or QQQ).

 

4.  The good time to invest is when volatility is low; of course it can be hard to predict what "low" is at any moment.  Because of that we tend to price things based on cost of the hedge.  We do that by taking the cost of the hedge divided by the amount of stock we currently control.  Anything below 7.5% is good anything over 10% is "expensive."  Yesterday when I entered some positions the cost was around 8.5% or so

[yalgaar 40]

@Kim @cwelsh

 

Trying to understand more about Anchor system. So have following specific questions:

1) Let's say I want to start Anchor today. What is the recommended capital to start.

2) What exact trades I would be taking tomorrow morning to start? 

3) Are there any challenges with fills for doing this system?

4) Can you explain me a situation when you would lose money in Anchor?

5) Can you explain a situation when you would under perform SPX?

 

 

[Kim 7,943]

1) The model portfolio is based on $100k. I believe the minimum is $50k
 

2) You will build the portfolio based on detailed instructions (the long calls, the long puts and the short puts) and then you will start rolling the short puts every 2-3 weeks based on market conditions.

3) No. Anchor trades SPY, diversified Anchor you can add IWM, QQQ and EFA. All of them have the most liquid options, so no issues with fills at all.

4) If the indexes go down, depending on the magnitude and the speed of the decline, Anchor can lose money, but almost always it will lose less than the indexes.

5) @cwelsh can explain better, but I think in case of sideways markets Anchor might underperform.

[cwelsh 1,549]

There are two "bad" scenarios for Anchor.  The worst is also the most unlikely, which is a what I call a whipsaw stair down.  If we have a market that looks like:

 

1.  Over a three week period the market drops 2%-4% and we have to close the short puts for a loss;

2.  Over the next three weeks the market goes back up 1% to 3% -- so our short puts gain, but we don't gain as much as we lost over the last three weeks

3.  Steps 1 and 2 repeat for an extended period of time

In that scenario, we "bleed" on selling options, but the long puts keep losing time value because things are staying basically flat.  We expect one or two periods like the above per year, but it's when we get a LOT of them in a row that problems happen.

 

The second bad scenario is markets that stay generally flat and volatility keeps declining.  In that situation, our long calls actually will lose some value (they're not a 1 delta, so there is some time value), or long puts will lose a lot of value, and we won't gain very much from selling short as volatility is declining.  What's interesting is that we can't just say "flat markets over the year are bad."  Go look back at this spring, where the markets collapsed, then rushed back up.  We actually did well during that period.  It's when they are truly flat -- not just a flat result after a six month period.  This will happen to Anchor sooner or later.  When I went and reviewed the history of the markets, about 15% of them are what I would call "flat."  It is ENTIRELY possible, if not probable, that if the market is up 3% on a year at a rate of 0.25%/month, that we'll be down at least 3%, if not more (depends entirely on amount of leverage).  

 

However, that's a trade-off I'm willing to take.  If in bull markets, I out perform, and in bear markets I out perform, I'm willing to underperform in flat.

 

Last thing, be careful about general rules like "outperform in bull markets," it is possible to design a bull market where we DONT outperform.  But that depends on the amount of leverage and how the gains occur.  If the market is flat, jumps 10% in a day, is flat for 4 months, then jumps 10% in a day, we might actually end up lagging the market a bit.  (We'll still be up).  

 

The great thing about Anchor is we can model exactly how it will perform in any market condition -- excel is great for that.