Leaderboard

The same diversification benefits that would apply to owning the equities outright via ETF's should transfer over to put writing, and all of these products have a highly liquid options market. In this post, we'll look at a simple backtest that includes SPY, IWM, EFA, and EEM from 2007-2018. The weights and parameters will be as follows: SPY: 30% IWM: 20% EFA: 37.5% EEM: 12.5% This roughly correlates with current global cap weighting, with an overweight to small cap in the US. The put selling parameters are simple as well: 30 DTE entry, held until expiration, selling the strike closest to 50 delta (roughly at the money). Results are net of transaction cost assumptions for both commissions and slippage, and options are assumed to be fully collateralized with 1 Month US T-Bills. Option backtests were done with the ORATS Wheel, which comes with a free trial. It's a great tool that I highly recommend for those interested in backtesting option strategies, which otherwise can be quite a challenge. I then uploaded the data to Portfolio Visualizer to be able to simulate a portfolio inclusive of T-bill collateral yield. Hypothetical Results: (Portfolio 1 represents our put write portfolio. Portfolio 2 represents holding the ETF's directly in the same weights, with monthly rebalancing): Results are hypothetical, and do not represent performance that any investor actually attained. Past performance doesn't guarantee future results. During this 12 year period we see a nice improvement in risk-adjusted returns with our put write portfolio relative to owning the ETF's directly. A shallower drawdown during the 2007-2009 GFC, roughly 35% less portfolio volatility, and even a slight overall improvement in total return. During a tough 2018, the put write portfolio would have been down about half as much as the ETF portfolio (-5.5% vs. -10.6%). This outcome is similar to what can generally be seen when studying CBOE's PUT (S&P 500 put write) and PUTR (Russell 2000 put write) historical index data which extends back much further. For example, PUT historical data starts in 1986, allowing investors to analyze over 3 decades of hypothetical put writing performance. Conclusion Options are an incredibly versatile asset that can be used to strengthen an overall portfolio in many ways. The volatility risk premium, which largely explains the positive performance of put writing, is not something we should expect to go away for the same reasons we don't expect the equity risk premium to go away. Both can be thought of as having an intuitive risk-based explanation. Retail and professional traders could likely improve their long term equity allocations by incorporating put writing into their investment process. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

I can add that task to my todo list. No eta though.

Seeing how large blocks of options moved compared to smaller positions was eye opening over the past few years. I’ve heard from quite a few frustrated Steady Options members who have had issues getting anything close to the Steady Option’s official numbers. The complaints generally fall in the range of (a) the numbers must be made up (they’re not), (b) it’s impossible to get those numbers (it’s not), and/or (c) what am I doing wrong? (Hint: the last question is the one everyone should be asking.) Trading of any form is not easy. Trading of options, particularly in the higher frequency format that Steady Options tends to use, is even more difficult. In part, this is due to how fast option prices move, the various components that make option prices (Greeks), and to typical investor/trader psychology. Like any profession, most people get better with practice. However, I’ve noticed option trading (and to a lesser extent trading in general), tends to attract large numbers of people who don’t seem to be able to “get it.” Regarding Steady Options, I have heard from well over a dozen members over the years that have stuck with it, often for over a year without making progress in understanding how to achieve the same success. Why is that? Why can some people figure it out, and others have difficulty? Well, one common thread among those who report having trouble duplicating the results is the lack of record keeping – in particular, a trading journal. Every option trader should keep a detailed trading journal. I use an excel spreadsheet. The categories have varied over the years, but I’ve settled (for now) on the following fields: Date Trade (e.g. BTO CSCO Feb 15 Call) Quantity (number of contracts) Price Commission Earnings (or close by) date Previous quarter RV Previous 8 quarters average RV Enter below/above average RV Average post earnings move last 8 quarters SPY Price at time of entry VIX at time of entry Steady Options Entry Date (official trade) Steady Options Trade (official trade) Steady Options Price Comments In the comments portion, I always put thoughts on the current market. If I entered above average RV, I list why, and I try to put thoughts on targeted closing prices (or expected closing prices). For example, if CSCO had an average gain of 7.5% the last 4 cycles, I would say “CSCO has gained an average of 7.5% the last 4 cycles, if the position ever has gains of 10% or more, exit.” When a trade is closed, I enter information in the comments column. If I do better than the official Steady Options trade (rare), I explain why. If I do worse, I try to explain why. Sometimes I do worse because I was late to the trade and the market had moved. Sometimes I do worse because I had projected a closing price (such as CSCO at 10%), exit, but the official Steady Options trade ran longer and experienced more gains. Once I did worse because I was away from the computer when I received an unexpected assignment, with time value left, and had a forced liquidation of positions, leading to losses. Sometimes I did worse because of a trading error (e.g. entered the wrong strike, the wrong period, etc.). Sometimes I did worse because I was risk adverse and only took on a 5% position, when the Steady Options’ trade was 10%. Sometimes it was the opposite (taking on more risk). The list of why I underperformed the official trades is quite long…but so is the list of when I outperformed. It is also helpful to list trades you don’t do and why. For me, the most common reason is I missed the trade. The official trade might go up at 10:00, I’m with a client, and by 10:20, the price has moved $1.00 and it never comes back to an entry point. Without a record such as this, you will never learn to spot your mistakes,or understand how to improve. The investors that have done the best with the Steady Options strategies are those who develop their own understanding of them, why entries are done where they are and when, how to manage the trades, and how to react when you are “off” in time from the official trades. It’s amazing what a trade journal can teach. For instance, over the last five years, I never could match or beat the official trades on YUM or TIF. It was driving me crazy. This was true whether I reacted to the official trade in under a second or predicted where the official trade would enter and got a better entry price. In digging out the trade journal, only one thing jumped out – namely that Kim’s trades were on smaller positions. I was trading an account of more than $10,000. What if I switched to using a smaller allocation on them…maybe only trading $2,000 or even $1,000? Well, last cycle that worked. Hopefully, it will work going forward, too. Other times, a trade worked very well five or six cycles in a row, but then it stopped for several cycles. Such results seem puzzling until I looked at the volatility numbers in the market and realized that the trade performs well in low volatility but not well in high volatility…regardless of what the RV of the trade was. But more than anything else, a trading journal forces traders to do more than blindly follow the official trades. The reason I like the Steady Options community so much is that it encourages members to learn, ask questions, and actually understand what is happening, rather than members just attempting to duplicate results. If you are chained to your computer immediately mimicking the trades as posted, you might have good results, but very few people have that flexibility or time. A trade journal forces you to learn, as well as helping you to see questions you should be asking of the community. To help all of our members, we would like to encourage you to enter your trade journal entries in the thread setup for that trade after the trade has closed. Here, you can post your trade journal entries and ask for feedback. This will be particularly valuable after several trading cycles on a single position (e.g. you’ve traded a DIS earnings straddle three times and significantly missed the official performance all three times). I am anticipating that some common mistakes will emerge, and we will be able to create a helpful guide for avoiding those mistakes. I also hope that this will allow our entire community to identify “better” trades and improve as option traders. Christopher Welsh is a licensed investment advisor and president of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics.

For those who don’t know what Anchor or the Leveraged Anchor is – a brief background: Anchor Trades were created to address a common desire, the ability to participate in up markets without being at major risk in down markets. There are a plethora of insurance/annuity products that seek to address this, however such products are often hampered by fees, penalties for cashing out or trading out, and caps on gains. Anchor was created to address those concerns. Originally the plan was to take a long position (such as in SPY or other ETFs) and one hundred percent hedge the position using one year put options. The problem with such an approach is the hedge typically cost between 7%-12% of the total portfolio, which makes it cost prohibitive…unless we can come up with a way to “pay for the hedge.” Anchor attempts to pay for the hedge by selling calendar put spreads on the theory that short term volatility is priced at a higher premium than long term volatility. By way of a simple example, a one year out at the money put might cost $12.00. Yet that same at the money put only one month out likely cost $2.00. So if you were to hedge your portfolio every month, as opposed to yearly, it would cost twice a much. All other things being equal, you should be able to cover the cost of a long dated put by selling short dated puts. Of course it’s not that easy in practice as the markets don’t stay flat. But that is the basic premise behind Anchor. Anchor’s primary defect, which was proved over the last 5-10 years of bull markets is that it consistently lags behind the market in up markets. This makes sense as an Anchor portfolio is only 90% long and devotes about 10% to the hedge. That means in the best case, Anchor is going to lag the market 10%. In reality, it typically lags a bit more. In prolonged bull markets, this leads people to abandon the strategy (often near a market crash). So to address the concern, we began looking at how to increase performance in bull markets, without hurting to much in down markets. (There always is a trade off, but the plan is to make it as little as possible). As discussed in earlier comments on the Leveraged Anchor trade, it carries several benefits that Traditional Anchor and/or simply being long the market does not: By using deep in the money call positions, as opposed to long stock positions, 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; 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; In the event of very large crashes, we can actually make money. 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; 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. This is the thirty day performance of the Leveraged Anchor portfolio entered today, at different possible market prices. Note what starts to happen as SPY continues to decline below the 200 point – the value of the portfolio actions starts increasing again. By SPY 150 the portfolio is back into positive territory – even though the market has declined 40%. In reality, this is unlikely to happen, but if a fifty percent or more market drop were to occur, this would be a great benefit. (Note: this happens with Traditional Anchor as well, just at a slower rate); 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: 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. A word of caution on the above table -- it cannot simply be extracted to longer periods of time because of the short puts. This is particularly true on the down side. When we roll the short puts after 25-30 days, we realize a loss on those positions. If we re-enter the short puts, as the strategy calls for, and the market keeps going down, the above stated losses could increase. The official trade we entered was posted this week on the forum. The six contracts of SPY gives us control over 600 shares, which at a current price of $249/share, provides control over $149,400 of stock – or right at 1.5x leverage. BIL is currently yielding right around 2.3 percent after the most recent interest rate increases. Given that almost half of our portfolio is invested in this, that will “goose” the portfolio an extra 1.15% per year. It also provides quite a bit of flexibility to roll the long hedge up, cover losses on the short hedges, or to rebalance the whole portfolio after larger gains. We’re looking forward to the coming year and continuing to work with everyone at Steady Options. Related articles: Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update