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  1. Many conservative investors buy these products to have downside protection in years when the index declines in exchange for limited upside potential in years when the index rises. In this article I’ll illustrate an example of how conservative investors who might be attracted to indexed annuities could replicate the risk/reward characteristics of index annuities using simple low-cost index mutual funds. I’ll then compare the historical performance of both strategies based on an illustration I recently received for an indexed annuity product that is popular among brokers. Indexed Annuity Hypothetical Performance, 1993-2020 The below screenshot is from one of the top providers of indexed annuities in the US. Many indexed annuities are extremely complex and very difficult for consumers to understand, but this one is straightforward and does not include any other features such as an income rider that are often added on to the contract for an additional fee. The insurance company provides a floor of 0% in years where the index is negative, and a current cap of 4.4% in years where the index increases by more than 4.4%. In years where the index returns between 0% - 4.4%, the interest credited to the contract would be equal to the index return. This straightforward floor and cap methodology makes it very simple to illustrate what the growth of $100,000 would have been over the last 28 years. $100,000 would have grown to $231,479, an average return of 3.06% and a compounded return of 3.04%. This is less than one third of the average return of the index. A popular way to replicate actual index performance is to own an index fund such as the Vanguard S&P 500 index fund, which would have grown $100,000 into $1,460,176. Many people who are anti-index annuity will point out this massive performance difference, which is unquestionably true, but it ignores the reason why most people purchase these annuity contracts which is downside protection. Therefore, a conservative portfolio of index funds with similar risk/reward characteristics is a more appropriate comparison. Conservative Index Fund Portfolio vs. Indexed Annuity, 1993-2020 Life insurance companies typically take contract deposits received by purchasers and buy derivative contracts such as index call options paired with fixed income securities to create the floor and cap combinations that support the underlying guarantees in the contract. While this same process could be implemented by individual investors, it’s too complex for most people. A simpler approach is to pair an equity index fund, such as the Vanguard 500 fund, with short and intermediate term high quality bond funds. In the following example, the exact portfolio utilized is displayed below and a direct link to performance data can be found HERE. Rebalancing is assumed to occur based on 5%/25% rebalancing bands. A total of only 12 rebalancing trades would have been necessary over the last 28 years. The conservative portfolio of index funds is the clear winner, at least over the last 28 years. I highlighted negative years in red, and although the index annuity has a 0% floor, that floor has been of little value when compared to a conservative index fund portfolio with only 15% equity exposure. This was true even in 2008 when the index lost 38.49%. The ending wealth is more than twice as much with the index fund portfolio, and the investor would also maintain full liquidity. In a non-qualified account, the index annuity would have the advantage of tax deferred growth (a US tax law feature of all annuities), but with the tradeoff of all withdrawals of earnings being taxed as ordinary income. After tax returns would be the same in a qualified account such as a Traditional or Roth IRA. Conclusion The downside protection features of many life insurance company products often appeal to the emotions of an average investor, and commission-based brokers will often play on these fears when marketing annuity products. The truth is that insurance companies don’t have a magic wand, and in most situations a better risk/reward profile can be created with low-cost index fund portfolios containing low equity exposure. An exception would be lifetime income immediate annuities, which are a separate product from what is discussed in this article, as they add an additional component to returns known as mortality credits that cannot be easily replicated. For this reason, academic research is typically in favor of immediate annuities for retirement income planning while conclusions are much more mixed on the benefits of indexed annuities. The next time you receive a postcard from your local annuity salesman offering a free steak dinner if you listen to a pitch about the latest and greatest indexed annuity, keep this article in mind and know the hard sell is likely to follow. If you currently have an indexed annuity and would like to receive a second opinion, please feel free to reach out to me at jblom@lorintine.com. 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.
  2. The bad news is that the annualized volatility of the market premium has been almost twice as large as the premium itself at 15%, and therefore has had a wide range of approximately -40% to +50%. Many are not fully aware of the implications volatility has on the probability of a positive outcome over meaningful periods of time. For example, below are the historical frequencies at which the US equity market premium has been positive since 1927: As investors, our goal should be to maximize the odds that our investments meet our long-term financial goals. In order to achieve this objective, we could attempt to time the market premium (get out/in of the equity market when we think it will underperform/outperform T-Bills), but this is so difficult to do consistently that it may be imprudent to try. Alternatively, we can diversify within the equity market by giving greater than market cap weight to stocks with certain characteristics, or factors, that academic research has found to have higher expected returns and diversification benefits. This includes the higher historical average returns of Small Cap stocks vs. Large Cap stocks, Value stocks vs. Growth stocks, and stocks with high relative Profitability vs. stocks with low relative Profitability. Below are the historical frequencies of outperformance since 1926 for each factor. Note that due to data limitations, profitability is measured since 1963. All data is from Dimensional Fund Advisors. There are many ways investors can use this information. For the purpose of this article I’m focused on how we can use it to build a portfolio with a higher frequency of beating T-Bills than a market portfolio, as well as the frequency of a “factor tilted” portfolio beating a market portfolio. In the below chart, the factor tilted portfolio that gives slightly greater than market weighting to Small Cap, Value, and high relative Profitability stocks is referred to as “Adjusted Market”. There are mutual funds and ETF’s available that investors could purchase that would provide similar expected returns to what is displayed in this chart. Not only would this factor tilted adjusted US equity portfolio historically have higher than market returns (average premium over T-Bills of 9.95% annually since 1950 vs. 8.37%), the data shows it would have also provided a slightly more consistent premium over 5- and 10-year rolling periods. Conclusion Our goal as investors should be to build portfolios that can most reliably meet the required rate of return that it will take to reach our long-term financial goals. In order to know this, a financial plan with clearly described goals is required. We should focus on only taking risks that cannot be easily diversified away, and therefore the market provides compensation for bearing. These risks include the factors mentioned in this article, including the risks of the Market as a whole and of Small Cap and Value stocks. Investors may consider adding greater than market cap weighting to these known sources of expected return for their equity portfolios.This can easily be done today at low costs with certain mutual funds and ETF’s. By simply “tilting” a portfolio to these risk factors, diversification is still maintained across roughly 3,000 stocks that make up the total market. Similar to an investors decision of how much to hold in stocks vs. bonds, an investor must consider how much they include factors in their equity allocation. 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. Related articles Coming To Peace With Market Volatility Should You Care About The Sharpe Ratio? Thinking in terms of decades The benefits of diversification The Importance of Time Horizon When Investing How I Invest My Own Money Realistic Expectations: Using History as A Guide Risk Depends On Your Time Horizon
  3. The below chart illustrates the wide range of one-year outcomes. Investors should attempt to truly internalize the emotions they are likely to feel with this type of very normal and expected volatility associated with equity investing. Euphoria when volatility results in above average premiums and despair when volatility results in substantially negative premiums. There has historically been about one third of all years where the equity premium was negative (the equity market underperformed T-bills), and sometimes by substantial amounts where an investor would have experienced significant short-term capital losses taking several years to recover. Even at a 10-year time horizon, the historical frequency of a market portfolio of US stocks outperforming riskless T-bills has not been guaranteed, with approximately 15% of periods resulting in a negative equity premium. 15% of historical 10-year periods would have resulted in a time of reflection where you realized you took risk for an entire decade without receiving a reward relative to leaving your capital in the safety of T-bills, which are a proxy for cash/money market. Over time an investment in the total US equity market is expected to provide investors with a return that is many multiples of an investment in risk-free T-bills, otherwise investors would not take on the risk. Diversifying globally further increases these odds, but it’s never a guarantee so investors should come to peace with this uncertainty in order to make better informed investment decisions. Choice #1: Resist the lessons available within the historical data and endlessly pursue the hope of finding someone or something that can remove the risk of the equity market without also at the same time removing the return. Choice #2: Come to peace with the historical data, knowing the odds of earning the expected equity premium improve as your time horizon increases, and build a financial plan that accounts for the probabilities. I believe the second choice is the more likely path towards a long-term successful investment experience as the historical evidence against active portfolio management is overwhelming to the point to where it's imprudent to even try. This is a market-based approach where an investor focuses on what they can control, such as minimizing costs & taxes and thinking through proper asset allocation between stocks, bonds, and cash suitable for their situation. At the same time an informed investor knows how volatile the equity premium can be and is less likely to panic sell when it’s negative for a long period of time. Surprise is often the mother of panic, so it’s best to become a student of history so that you’re not surprised when the risk shows up. Harry Truman said "The only thing new in the world is the history you don’t know.” In an excellent piece available upon request titled “The Happiness Equation”, Brad Steiman of Dimensional Fund Advisors writes “Ancient wisdom teaches acceptance, as resistance often fuels anxiety. Instead of resisting periods of underperformance, which might cause you to abandon a well-designed investment plan, try to lean into the outcome. Embrace it by considering that if positive premiums were absolutely certain, even over periods of 10 years or longer, you shouldn’t expect those premiums to materialize going forward. Why is this? Because in a well-functioning capital market, competition would drive down expected returns to the levels of other low-risk investments, such as short-term T-Bills. Risk and return are related.” Would acceptance or resistance better describe your current portfolio and emotional state as an investor? If it’s resistance, what are you going to do to get closer to a state of acceptance to increase your odds of a successful investment experience? 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. Related articles: Coming To Peace With Market Volatility: Part II Should You Care About The Sharpe Ratio? Thinking in terms of decades The benefits of diversification The Importance of Time Horizon When Investing How I Invest My Own Money Realistic Expectations: Using History as A Guide Risk Depends On Your Time Horizon
  4. Last week I came across the following Tweet: 1,300% return in one day?? This is how the trade looks in ONE software at the time of the opening: ONE shows a maximum return of only ~7%. What is going on here? This trade is long one call and short 2 calls. Which means one of the calls is naked and requires huge margin requirement. If you are not a member yet, you can join our forum discussions for answers to all your options questions. When the trade was closed on Apr.17, this is how it looked: Explanation for "1,300% gain"? This calculation ignores the margin requirement on the short options. When a trade requires a margin (like credit spreads or naked options), the return cannot be calculated on cash outcome - it has to account for margin requirement. As a side note, it was a good trade. No downside risk, and upside risk starts at 2,900 (over 100 points move in one day). But the gain was nowhere near 1,300%. Related articles: How To Calculate ROI On Credit Spreads How To Calculate ROI In Options Trading
  5. Performance Dissected Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower, depending on the broker and number of trades. Please read SteadyOptions 2019 Performance Analysis for full analysis of our 2019 performance. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. Please refer to How We Calculate Returns? for more details. Our strategies SteadyOptions uses a mix of non-directional strategies: earnings plays, Straddles, Iron Condors, Calendar Spreads, Butterflies etc. We constantly adding new strategies to our arsenal, based on different market conditions. SO model portfolio is not designed for speculative trades although we might do some in the speculative forum. SO is not a get-rich-quick-without-efforts kind of newsletter. I'm a big fan of the "slow and steady" approach. I aim for many singles instead of few homeruns. My first goal is capital preservation instead of doubling your account. Think about the risk first. If you take care of the risk, the profits will come. What's New? We continue expanding the scope of our trades. We are now trading hedged straddles, short term straddles, ratio spreads and more. We launched Steady Momentum and Steady Futures services. We have implemented more improvements to the straddle strategy that reduces risk and enhances returns. We started using the CMLviz Trade Machine to find and backtest some of our trades. This is an excellent tool that already produced few nice winners for us. What makes SO different? We use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night. Our performance is based on real fills. Each trade alert comes with screenshot of our broker fills. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage. It is not a coincidence that SteadyOptions is ranked #1 out of 723 Newsletters on Investimonials, a financial product review site. Read all our reviews here. The reviewers especially mention our honesty and transparency, and also tremendous value of our trading community. We place a lot of emphasis on options education. There is a dedicated forum where every trade is discussed before the trade is placed. We discuss different strategies and potential trades. Unlike most other services that just send the trade alerts, our members understand the rationale behind the trades and not just blindly follow the alerts. SO actually helps members to become better traders. Other services In addition to SteadyOptions, we offer the following services: Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors. Anchor Trades produced 38.4% gain in 2019, beating its benchmark by 7.0%. Steady Momentum - puts writing on equity indexes and ETF’s. Steady Momentum produced 19.1% gain in 2019, beating our benchmark by 5.5%. PureVolatility - Volatility products like VXX and UVXY. PureVolatility produced 28.3% gain in 2019. Steady Futures - a systematic trendfollowing strategy utilizing futures options. Steady Futures produced 8.6% gain in the second half of 2019 (launched in July 2019). We offer a 5 products bundle (SteadyOptions, Steady Momentum, Anchor Trades, PureVolatility and Steady Futures) for $745 per quarter or $2,495 per year. This represents up to 50% discount compared to individual services rates and you will be grandfathered at this rate as long as you keep your subscription active. Details on the subscription page. More bundles are available - click here for details. Subscribing to all services provides excellent diversification since those services have low correlation, and you also get the ONE software for free for 12 months with the yearly bundle. We also offer Managed Accounts for Anchor Trades and Steady Momentum. Summary 2019 was another excellent year for our members. All our services delivered excellent returns. SteadyOptions is now 8 years old. We’ve come a long way since we started. We are now recognized as: #1 Ranked Newsletter on Investimonials Top 10 Option Trading Blogs by Options Trading IQ Top 40 Options Trading Blogs by Feedspot Top 15 Trading Forums by Feedspot Top 20 Trading Forums by Robust Trader Best Options Trading Blogs by Expertido Top Traders and People in Finance to Follow on Twitter Top Trading Blogs To Follow by Eztoolset Top Twitter Accounts to Follow by Options Trading IQ I see the community as the best part of our service. I believe we have the best and most engaged options trading community in the world. We now have members from over 50 counties. Our members posted over 125,000 posts in the last 8 years. Those facts show you the tremendous added value of our trading community. I want to thank each of you who’ve joined us and supported us. We continue to strive to be the best community of options traders and continuously improve and enhance our services. Let me finish with my favorite quote from Michael Covel: "Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between." If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee. Happy Trading from SO team!
  6. First, as one of our members wrote, how many traders would consider 40%+ returns as subpar? We are definitely in a good shape if 41.7% is considered "well below" average. Most traders would be delighted to have our worst year as their best…But lets see what happened in 2019. Each year, our contributor @Yowsterbreaks down the numbers by trade type. Here is 2019 Year End Performance by Trade Type. As you can see, our returns have been heavily impacted by few big losers back in January and May. You can read a full analysis of January 2019 performance. We had some very large losing trades: Index trades (SPX, TLT, EEM, XLV): 4 big losing trades SPX (-100%, -100%, -72.9%) and TLT (-100%) killed the performance of these trades this year. VIX-based trades: 3 losing trades which play for VIX to fall from highs, or looking for movement in either direction all failed. Broken-wing Butterfly (BWB) Trades: One big -96% losing trade exceeded the gains from all winning trades. Of the top 10 losers only one was from the calendar or straddle trades (and it was at #10). Take away those 10 biggest losers and the model portfolio gain gets to ~90% (non compounded). When you dig into the numbers you see that the overall contribution from our “bread and butter” calendar and straddle trades is on par with prior years (multiply avg gain per trade by number of trades). Since May we made some adjustments, and in the second half of 2019 the model portfolio was up 63%, which translates to annualized compounded return of 165%, in line or better with our previous years. Our core strategies continue to work very well. In fact, if we traded only straddles, calendars and ratios, the yearly return would be well into the triple digits. Going forward, the goal is to avoid those bigger losses, and we are going to reduce the number of those higher risk trades and focus mostly on straddles, hedged straddles, calendars and ratios. On a related note, I got the following message from one of the former members: "So it is fair to say that there is definitely luck involved in trading any trading strategy. I happened to select to test your system at probably the worst 6 month period you have had in 8 years. Any other 6 month period … including 3 months earlier or three month later… would have provided drastically different results." This is true, but isn't it true for any investment? Someone who entered the stock market in March 2009 would have drastically different results from someone who started in 2007 and experience the 50% drawdown. This is also true for many best performing stocks. Apple, Amazon and Google produced incredible gains since their IPOs, but also experienced few large drawdowns, ranging from 65% to 94%. Of course those stocks have also experienced many smaller pullbacks of 20-25%. If you owned one of those stocks and sold them after each pullback, you would never achieved those long term results. In a similar way, if you started SteadyOptions subscription in December 2018 and cancelled after the January drawdown, you would missed the following 63% recovery. If you cancelled after our previous drawdown in 2016, you would missed the following gains of over 400%. Drawdowns are an inevitable part of achieving high returns. If you haven’t yet experienced a significant decline, then you probably haven’t owned something that has appreciated 10x, 20x or more. Or you simply haven’t been investing for that long. All big winners have drawdowns. Accepting this fact can go a long way toward controlling your emotions during periods of adversity and becoming a better investor. To put things in perspective, SteadyOptions produced Compounded Annual Growth Rate of 120.3% since inception. You cannot produce such high gains without taking some risk. We are trying to avoid the drawdowns as much as possible, but the truth is that 20% drawdowns are normal and expected for a strategy that produces such high returns. Finally, take a look at SteadyOptions historical performance: Only 3 out of 9 years we produced "subpar" double digit returns. If the historical pattern continues, the next 2 years should be very rewarding.. Stay the course!
  7. For example, Bernie Madoff was able to run the largest Ponzi Scheme for decades by intimately understanding human psychology. Criminals like Madoff are often highly intelligent people who know how to prey on human emotion. He knew that if he told people they were making extraordinary returns they’d get suspicious and he might get exposed for the fraud that it was. So he instead played on the emotions of investors, many of whom were savvy enough that they should have known better, by telling customers they were making above average returns without the commensurately higher risk. During the 2008 Financial Crisis, investors were so panicked that they were selling investments of all kinds, causing Bernie’s house of cards to finally collapse. So how can we use history as a guide? We first should consider the words of Spanish philosopher George Santayana – “Those who cannot remember the past are condemned to repeat it.” A basic tenant of investing is that the path to higher returns is found through taking higher risks. Anomalies that suggest higher returns without a commensurate increase in risk should be approached with a high degree of caution and skepticism. It’s also important to note that academic theory and evidence tells us that not all risks come with higher expected returns…such as selecting individual stocks. We should only take compensated risks in the form of diversified portfolios and avoid taking uncompensated risks like holding individual securities. Below are several widely known risk factors that leading academic researchers have identified to lead to commensurately higher returns: Diversified bond portfolios have higher expected returns than riskless Treasury Bills. Diversified total stock market portfolios (Market Beta) have higher expected returns than bond portfolios. Stock portfolios with increased weightings toward smaller (Size) and lower priced(Value) companies have higher expected returns than market portfolios. With this information in mind, investors can construct well diversified portfolios based on their own unique ability (time horizon), willingness (risk tolerance), and need (required return to reach goals) to take risk. But the nature of risk and return is that expected returns do not always result in realized returns. If the relationships described above always played out as expected, there would be no risk. So back to the concept of history as a guide, we can look back to see how often these relationships between risk and return did not work out. The above chart is from Larry Swedroe’s excellent article, “Value Premium RIP? Don’t You Believe It”. The chart tells us how frequently each source of expected return was not realized over 1/3/5/10 and 15 year rolling periods since 1927. For example, the US stock market underperformed riskless Treasury Bills over 30% of 1 year, 19% of 3 year, 16% of 5 year, 7% of 10 year, and 0% of 15-year periods since 1927. Investors simply aware of this data would be much better equipped to make sensible investment decisions as well as understanding proper expectations. If you had capital you could invest for 1 year, you likely wouldn’t take risk if you knew there was a 30% chance of failure. Additionally, the magnitude of failure over one year can be quite great, with the stock market not only underperforming risk-free treasury bills but also producing losses (occasionally large ones). Now contrast this with the 15-year timeframe where there has never been a period of underperformance, making the thought of holding riskless treasury bills for this long (or longer) seem equally as irrational as holding stocks for only one year. Forewarned is forearmed. As it relates to the actual equity portfolio, many investors are surprised by the historical evidence that increasing exposure to small and value stocks has outperformed a market portfolio about as often as a market portfolio outperforms treasury bills. My firm recommends the use of Dimensional Funds for the implementation of this research, and since 1970 the globally diversified and small value tilted Dimensional Equity Balanced Strategy has outperformed a market like S&P 500 portfolio in 80% of 10-year periods by an average of more than 3% per year. Note this also would have occurred with comparable risk due to the benefits of diversification. Conclusion It’s very easy and human to overcomplicate things, including investment decisions. The knowledge and historical perspective of a great financial advisor with a focus on the best interests of the client can lead to better investment experiences and greater peace of mind. A focus on the things that we can control, such as allocating capital according to time horizon, diversification, fees and expenses, taxes, and rebalancing are all ways we can stack the odds in our favor. Understanding the historical probabilities can also lead to greater patience to endure the difficult times when the known risksof investing actually show up. Enjoy the ride! 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.
  8. The potential for misunderstanding also exists among even experienced market participants, given that index levels have risen over time and potential emotional anchors, such as a 500-point move, do not have the same impact on performance as they used to. With this in mind, we examine what a point move in the Dow means and the impact it may have on an investment portfolio. Impact of Index Construction The Dow Jones Industrial Average was first calculated in 1896 and currently consists of 30 large cap US stocks. The Dow is a price-weighted index, which is different than more common market capitalization-weighted indices.[1] An example may help put this difference in weighting methodology in perspective. Consider two companies that have a total market capitalization of $1,000. Company A has 1,000 shares outstanding that trade at $1 each, and Company B has 100 shares outstanding that trade at $10 each. In a market capitalization-weighted index, both companies would have the same weight since their total market caps are the same. However, in a price-weighted index, Company B would have a larger weight due to its higher stock price. This means that changes in Company B’s stock would be more impactful to a price-weighted index than they would be to a market cap-weighted index. The relative advantages and disadvantages of these methodologies are interesting topics themselves, but the main purpose of discussing the differences in this context is to point out that design choices can have an impact on index performance. Investors should be aware of this impact when comparing their own portfolios’ performance to that of an index. Headlines vs. Reality Movements in the Dow are often communicated in units known as points, which signify the change in the index level. Investors should be cautious when interpreting headlines that reference point movements, as a move of, say, 500 points in either direction is less meaningful now than in the past largely because the overall index level is higher today than it was many years ago. Exhibit 1 plots what a decline of this magnitude has meant in percentage terms over time. A 500-point drop in January 1985, when the Dow was near 1,300, equated to a nearly 39% loss. A 500-point drop in December 2003, when the Dow was near 10,000, meant a much smaller 5% decline in value. And a 500-point drop in early December 2018, when the Dow hovered near 25,000, resulted in a 2% loss. Exhibit 1: Hypothetical 500-point Decline of the Dow Measured in Percentage Terms Dow Jones and S&P 500 data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. The chart illustrates what a 500-point drop would have been in percentage terms for the Dow Jones Industrial Average on a daily basis. It assumes a 500-point loss took place each trading day from January 1, 1985, to February 1, 2019, and uses daily historical closing values of the Dow Jones Industrial Average to compute the percentage change. Percentage change does not indicate the actual change in the Dow during the period shown. Actual results may vary. How does the Dow relate to your portfolio? While the Dow and other indices are frequently interpreted as indicators of broader stock market performance, the stocks composing these indices may not be representative of an investor’s total portfolio. For context, the MSCI All Country World Investable Market Index (MSCI ACWI IMI) covers just over 8,700 large, mid, and small cap stocks in 23 developed and 24 emerging markets countries with a combined market cap of more than $50 trillion. The S&P 500 includes 505 large cap US stocks with approximately $23.8 trillion in combined market cap.[2] The Dow is a collection of 30 large cap US stocks with a combined market cap of approximately $6.8 trillion.[3] Even though the MSCI ACWI IMI, S&P 500, and Dow are all stock market indices, each one tracks different segments of the market, so their performance can differ significantly over time, as shown in Exhibit 2. Since 1995, the Dow has outperformed the S&P 500 and MSCI ACWI IMI by an average of 0.5% and 3.3%, respectively (based on calendar year returns). However, relative performance in individual years can be much different. For example, in 1997, the Dow underperformed the S&P 500 by 8.4% but outperformed the MSCI ACWI IMI by 13.9%. Exhibit 2. Performance of MSCI ACWI IMI, S&P 500, and Dow by Calendar Year Dow Jones and S&P 500 data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2019, all rights reserved. MSCI ACWI IMI is the MSCI All Country World Investable Market Index (net dividends). Their performance does not reflect fees and expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. It is also important to note that some investors may be concerned about other asset classes besides stocks. Depending on investor needs, a diversified portfolio may include a mix of global stocks, bonds, commodities, and any number of other assets not represented in a stock index. A portfolio’s performance should always be evaluated within the context of an investor’s specific goals. Understanding how a personal portfolio compares to broadly published indices like the Dow can give investors context about how headlines apply to their own situation. Conclusion News headlines are often written to grab attention. A headline publicizing a 500-point move in the Dow may trigger an emotional response and, depending on the direction, sound either exciting or ominous enough to warrant reading the article. However, after digging further, we can see that the insights such headlines offer may be limited, especially if investors hold portfolios designed and managed daily to meet their individual goals, needs, and preferences in a broadly diversified and cost-effective manner. [1]Market capitalization is the product of price and shares outstanding. [2]500 companies are included in the S&P 500 Index. However, because some of these companies have multiple classes of stock that meet the requirements for inclusion, the total number of stocks tracked by the index is 505. [3]Market cap data as of January 31, 2019. This article is courtesy of Dimensional Fund Advisors.
  9. Jesse

    History is a Great Teacher

    Below is historical data for the Dimensional Equity Balanced Strategy Index since 1970. All figures are annualized. Average 12 months: 14.74% Best 12 months: 83.06% Worst 12 months: -51.27% Don't put your emergency fund in stocks. Average 3 years: 13.98% Best 3 years: 38.27% Worst 3 years: -19.01% The average investor thinks 3 years is a long time. Average 5 years: 13.96% Best 5 years: 34.18% Worst 5 years: -5.55% The average investor thinks 5 years is a really long time. Average 10 years: 14.38% Best 10 years: 24.61% Worst 10 years: 3.13% The average investor thinks 10 years is an eternity, yet history shows us that the difference between best and worse case scenarios can be in excess of 20% per year. Average 20 years: 13.31% Best 20 years: 20.71% Worst 20 years: 8.26% Best 20 years for risk-free 1 month T-bills: 7.73% At this horizon, the worst 20 year period for the equity index is greater than the best 20 year period for T-bills. But only those with the education, patience, and discipline to endure short term volatility will earn market returns. Global equities would have produced large positive returns, on average, since 1970. But by definition, half of the time returns are below average over any particular time period. Also, in the short term, we see that returns can be substantially negative. This is why the positive average returns of equities in excess of risk free T-bills is known as a risk premium. Investors must be thoughtful about their time horizons and their willingness to take risks when investing. Historical outcomes over various time horizons are great starting points for determining how much equity risk belongs in a portfolio to suit investment objectives. 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.
  10. For instance, if there were five long straddles on, it is fairly likely that there might also be a short volatility trade on as well. This would act as a hedge in the event that volatility dropped significantly, ameliorating some of the losses that would have come from the long straddles. Because of the way the trades are designed to interact, the below information and summaries should not be taken as the gospel. But it is our hope that the information can be used to improve trade weighting and structure overall. In 2018, Steady Options had 161 different trades, broken down as follows: 59 Hedged Straddles; 40 Calendar Spreads; 34 Butterflies or Iron Condors; 14 Volatility Trades (VXX and SVXY); 12 Straddles; and 2 others With the basic information of each type of trade, we find the following: Trade Type No. Trades Avg. Return Std. Deviation Max Gain Max Loss % Win Hedged Straddle 59 4.66% 7.00% 16.20% -15.70% 83.05% Calendar 40 9.62% 30.65% 47.50% -97.40% 77.50% Fly/Condor 34 16.72% 30.23% 81.40% -80.40% 85.29% Volatility 14 -13.68% 43.77% 40.90% -100.00% 28.57% Straddle 12 8.33% 11.46% 31.30% -11.60% 83.33% Other 2 3.20% 15.27% 14.00% -7.60% 50.00% A quick look shows us, not surprisingly, that Steady Options core trade of hedged straddles is easily the most reliable and lowest risk but also contains the lowest average return. Also, it has the smallest maximum loss for any of the regular trades which only goes to prove that, even in options, there’s no such thing as a free lunch. Higher returns come with higher risk. The highest returns came with Steady Options’ butterfly and iron condor trades. Members who has been trading these for a while, particularly the TLT butterfly or SPX butterfly, probably count such trades as key pieces of their strategies. The trades regularly generate returns of more than twenty percent. However, unlike the hedged straddles, if things move adversely against you, close to complete losses are possible. The TLT butterfly’s largest loss last year was over eight percent and the SPX butterfly’s largest loss was over sixty-five percent. Which is why Steady Options emphasizes position sizing. One of the most difficult things to do in active trading, and in particular options trading, is sticking to a plan and not creating larger positions than dictated by one’s trading plan. Steady Options uses a maximum position size of ten percent. Even that must be done cautiously if similar positions are on at the same time. For instance, if a member had on a full RUT condor and SPX butterfly, and the markets move significantly, it is likely that they both will be damaged. Since the butterfly/condor trades have a higher chance of higher losses, exposure is closer to twenty percent than ten percent. I personally avoid having both similar RUT and SPX positions on at the same time. TLT has a lower correlation than RUT and SPX, which makes having it on, at the same time as the SPX and RUT, less of an issue. One interesting factor to note, we should likely prefer a butterfly/condor trade to a calendar trade. They come with very similar risk profiles, standard deviations and max loss and win percentages, but the butterfly/condor trades have almost double the average return. Similarly, if a member was trying to decide between an unhedged straddle and a calendar position, the unhedged straddle is likely the better candidate, as it has a similar return profile (8.33% vs 9.62%), but lower risk with lower maximum drawdowns. Pulling up the rear are the volatility trades, which are easily the worst performing portion of the Steady Options library of trades. In fact, it is likely that I will not trade any of these moving forward as stand-alone trades. However, one of the great values of a volatility trade is using it to hedge straddle, butterfly and condor positions. I would still use it for this purpose. Given the Steady Options trades are typically examined by how they work together, viewing volatility trades on their own is a bit unfair. For example, if I had on five hedged straddles, I would be fairly inclined to put on a volatility trade if it setup correctly. In looking at this data and in trying to construct how to select what trades to do when, it appears that Steady Options does a pretty good job of blending the trades. The Hedged Straddles should be the most heavily weighted (they are). Moving forward, we may want to slightly increase the number of butterfly/condor trades and slightly reduce the number of calendar trades. Doing so should increase risk adjusted returns by a small bit. Sometimes potential trades exist which could be setup as either a calendar or unhedged straddle. These numbers tell us, everything else being equal, the unhedged straddle is likely the better trade from a risk adjusted standpoint. However, don’t take this as an absolute rule. For example, all of the AAPL calendars were successful trades, while the NFLX calendars were more volatile. Always dive further into the data and how individual instruments perform. Data like this can be dangerous if it is taken in isolation. Always keep in mind how trades interplay with each other, look further into how individual stocks play in different types of trades, and consider this data. This is merely another tool to use in creating a better risk adjusted trading plan. Our contributor @Yowster does performance analysis by trade type every year. Here are the highlights from his 2018 analysis: Pre-Earnings Calendars Average gain% down from prior years, largely because of 2 really big losers caused by large stock price movement away from calendar strike. Not really surprising given the bigger market swings this year. Without those big losers the average gain was right in line with prior years (we avoided big losers in prior years). Win rate comparable to prior years,. and very high. Pre-Earnings Straddles/Strangles Highest average gain percentage ever. Highest percentage of winning trades ever. Very low risk trades as it takes RV levels going much lower than prior cycles for these trades to be significant losers (only 4 of 72 trades had losses over -10%). Trade count down slightly from last year due to periods of elevated market volatility. These are riskier trades to open when IV is very high, as the risk for significant straddle price decline due to falling IV can really hurt trades. Index trades (RUT, SPX, TLT) Typically longer duration trades, can be open for 30+ days. Gain percentage down slightly from last year, due to 2 large losses. As with the calendars, this is not surprising given some of the bigger market swings. VIX-based trades Typical trade was for VIX to decline after spikes, but with larger and more sustained spikes this year there were many losing trades. Two 100% losses really hurt the overall average. Reverse Iron Condor (RIC) trades Started using the RIC trade later in the year during times when VIX was high (20+). Trades were designed to take advantage of larger price swings for stocks that was somewhat common during these elevated VIX times. When the stock prices moved, we saw some great gains. Going forward into January/February earnings cycles, will look to use RICs as alternative to straddles if VIX is still high – because although RICs hurt to IV decline, they are hurt by a lesser degree than straddles. However, downside of RICs compared to hedged straddles is that you need the stock price to move to make a profit. Summary 2018 was unlike prior years for significant chunks of time. Prior years had low volatility and any VIX spike above 20 quickly reverted back down. 2018 had VIX near 20 for about 5 months of the year (7 months were much like prior years). Despite the increase in volatility, 78% of all SO trades were winners with an average gain of 7.07%. The biggest take away from this year is that certain trade types are better for certain market volatility conditions – hedged straddles and calendars are great to put on when volatility is low but they are riskier when volatility is elevated. When volatility is elevated, other trades like RICs and butterfly are less risky to put on during these times. SO is a great community, where members share ideas that benefit all of us and we all continue to learn more and more. Looking forward to continued success in 2019. Christopher B. Welsh is a SteadyOptions contributor. He is a licensed investment advisor in the State of Texas and is the president of a small investment firm, Lorintine Capital, LP which is a general partner of two separate private funds. He offers investment advice to his clients, both in the law practice and outside of it. Chris is an active litigator and assists his clients with all aspects of their business, from start-up through closing. Chris is managing the Anchor Trades portfolio.
  11. January 2019 performance was negatively impacted by few big losers. We present below the analysis of those losing trades. TLT butterfly trade The TLT butterfly was opened on November 9. It started with slightly delta negative bias with the expectation that TLT will continue drifting lower. For various reasons, TLT reversed higher and never looked back. Our intention was to use any pullback in TLT price to reduce the loss. TLT continued higher almost in a straight line, and when it finally stabilized at the beginning of December, the trade was already down 70%+. We decided to keep it as a lottery ticket, but TLT continued higher and the butterfly expired worthless. We believed that the TLT rise is temporary and irrational, and it should reverse. Sometimes when you strongly believe in your thesis, you have to stick to your guts. TLT thesis worked very well for us for over 1.5 years, but this time was different. We believe that in the long term, we should stick to our thesis - unless it changes during the live of the trade. This approach proved to work very well over the last 1.5 years. To put things in perspective, TLT butterfly was one of our most successful strategies in 2017-2018. We closed 15 trades, 14 winners and 1 loser, for a cumulative return of ~300%. Few of those trades were down 40-50% just to reverse and produce solid gains. If we closed every trade that was down 50%, I doubt we would achieve similar performance. In summary, we believed in our thesis, and were right much more often than wrong - just not this time. SPX and VIX butterfly trades We implement the SPX butterfly strategy during periods of high volatility. We started using it during October volatility spike, and closed 5 winners in October-November, for cumulative return of 145% (29% average return per trade). Those trades work great if the markets continue lower, and can also serve as hedges. You can read about the strategy here. The January trade was open on December 21, and February trade was opened on December 24. On December 27 we also opened VIX butterfly trade as an additional hedge, after closing the previous VIX butterfly for 36% gain. With the markets still in a free fall, we felt like this was still an appropriate hedge under the circumstances. Those trades could benefit greatly from continuous market weakness. However, in the beginning of January the markets started to move up quickly, and all three trades started losing value. We had few other trades at that time that were bullish, so we decided to keep the SPX and VIX trades as hedges. The concern was that if we close SPX and VIX trades for 30-40% loss, and the markets reverse, we might lose the gains in the other trades as well. While the markets continued higher, SPX and VIX trades continued losing value. During the same period of time, we closed few nice winners as a result of the market recovery (GS, XLV, FB, BABA, CRM, MCD and more). Unfortunately those trades did not fully offset the losses in SPX and VIX trades. When the market started to recover, we mentioned few times that we considered those trades hedges at that point (each one was half allocation). The main lesson from those trades is position sizing. Putting things in perspective We had an incredible winning streak in the last 3 years. We had only one small monthly loss since May 2016 (1.8% loss in March 2018). During the same period of time, our model portfolio produced an average monthly gain of 8.2%, including 17.3% gain in December 2018 (while most major indexes suffered double digit losses). January was our second worst month since inception, but it happened after the 17.3% gain in December, so even if you started in December, you would be down only 3%. Occasional big losers are expected when you consistently produce such high returns. Without those few big losers, we would actually have had a decent month in January. But of course there is no woulda coulda shoulda in trading.. No rewards without risks Charles Bilello of Pension Partners provided a pretty good perspective on drawdowns. There is no such thing as a big long-term winner without enduring drawdowns along the way… Here are some examples: Apple has gained 25,217% since its IPO in 1980, an annualized return of 17%. But Apple investors from the IPO would also experience two separate 82% drawdowns. Amazon has gained 38,882% from its IPO in 1997, an annualized return of over 36%. But from December 1999 to September 2001, the stock suffered a 94% drawdown. Microsoft has returned 25% a year over the past 30 years, a remarkable feat. But it also suffered two significant drawdowns, one of them as high as 70%. Alphabet (formerly Google) has returned 26% per year since its IPO in 2004. It did not achieve these returns, though, in a straight line. Its largest drawdown: a 65% decline from 2007 through 2008. It should be clear from these four examples that drawdowns are an inevitable part of achieving high returns. All big winners have drawdowns. Accepting this fact can go a long way toward controlling your emotions during periods of adversity and becoming a better investor. The Big Picture We all would like all our trades to be winners, but we know this is not possible. Losers are the cost of doing business in trading. Most people know there will be losers. But to paraphrase Morpheus, "there's a difference between knowing that there will be losers... and actually experiencing them". In a probability game, we will eventually experience a string of losses. But even knowing that losses are part of the game, most traders still react the wrong way when those losses actually happen. How we react to our losses is what separates good traders from bad. It gets tough when we experience periods of losses or poor performances and that's where many traders quit because in the first place they never accepted emotionally that they are playing a probability game. Only when we accept emotionally that we are playing a probability game, we will be able to take our trading to the next level. After a losing streak, the natural thing is trying to "get it back". This would be a big mistake. The market doesn't know that we have lost money, and frankly, it doesn't really care. Trying to get it back will cause us taking more risk, and eventually, more losses. The best thing to do is to continue executing our trading plan that worked so well for us for over 7 years. "The Stock market is a wonderful reallocation machine, moving money from those focused on today to those focused on their long-term goals; from the emotional to the dispassionate; from those who trade on gut feelings to those who use a systematic method and from the greedy to the patient." - Jim O'Shaughnessy Sun always rises after the dark. Related articles: SteadyOptions 2018 - Year In Review SteadyOptions 2017 - Year In Review Big Drawdowns Are Part Of The Game Probability Vs. Certainty Trap Are You EMOTIONALLY Ready To Lose?
  12. Kim

    2018: A Year To Remember

    The graph below highlights the fact that while less than 2% of assets were negative in 2017, 90% of assets are negative YTD in 2018 -- they highest percentage since... ever. 2018 was a unique year in many areas. For example, 2018 was the only positive year for VXX since inception. On Monday, February 5, the Dow Jones Industrial Average declined by 1,175 points — its largest point drop in one day ever. VIX more than doubled in a single day — for the first time ever. The VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV), a product issued by Credit Suisse, and the ProShares Short VIX Short-Term Futures exchange-traded fund (SVXY), both plunged by 80 percent in the hours after the VIX’s spike. Those unprecedented events caused many funds to blow up their clients accounts. We covered the The Spectacular Fall Of LJM Preservation And Growth and James Cordier: Another Options Selling Firm Goes Bust, among others. Many investors also learned in 2018 that “Blue Chip” is a marketing term. Owning these stocks will not shield you from losses. For example, IBM’s share price finished 25.6% lower in 2018, and it is one of many blue chip stocks that were punished by the market in 2018. Some of the previous market darlings have been also punished hard in 2018. Facebook ended the year 25 percent down for 2018, and Apple was down 7 percent. There was virtually no place to hide in 2018. As Charlie Bilello mentions, in 2018, more than any year in recent history, the overwhelming majority of asset classes are down. In the table below of 15 asset classes ranging from stocks to bonds to REITs to Gold and Commodities, only one is higher: Cash. Data Source: Stockcharts.com If you maintain a globally diversified portfolio, this has likely been the worst year for you since 2008, with a 60/40 portfolio (AOR ETF) down just over 6%. During periods like 2018, many traders started to realize that incorporating options strategies into their portfolios might be not a bad idea. Here is how our strategies performed in 2018: Steady Options: This is our flagship service, trading variety of non directional strategies like Straddles, Iron Condors, Calendar Spreads, Butterflies, etc. The service produced 129.5% gain in 2018, proving once again that those strategies can make money in any market if implemented correctly. The model portfolio produced 17.3% return in December 2018 while most major indexes were down double digits. Anchor Trades: An Anchor trades goal is to protect long portfolios and to prevent loss of capital while still generating a positive return in all market conditions. It produced 5.4% loss in 2018, slightly outperforming the S&P 500. If the correction continues, the outperformance should continue, and the hedge should start to kick in. We will be implementing more changes in 2019 to improve the strategy performance in all market conditions. Steady Condors: This is a variation of Steady Condor strategy managed by the Greeks. It produced 12.9% loss in 2018, mainly driven by two huge corrections in February and October. While it is not pleasant to lose money, it is near impossible to make money with gamma negative vega negative strategy when the indexes move 3-4 SD in a matter of days and volatility doubles. Considering the market conditions, the strategy managed to keep the overall loss under control. Creating Alpha: The service has two model portfolios, trading mostly VXX and TLT. The strategy produced 13.0% gain in 2018. Considering that it was short volatility during a year when VXX almost doubled and some short volatility fund blew up their accounts, we consider it a remarkable result. The Incredible Winning Trade In SVXY provides some insights on how we trade the strategy. When volatility stabilizes, the strategy should produce much better results. 2018 was a wake-up call for a whole new generation of investors who entered the stock market after 2009 and watched their long portfolios going up year after year. As we have seen, the markets can go down as well. And when they do, you are better to be prepared. This might be just the beginning. Related articles: SteadyOptions 2018 - Year In Review The Spectacular Fall Of LJM Preservation And Growth James Cordier: Another Options Selling Firm Goes Bust The Astonishing Story Behind XIV Debacle The Lessons From The XIV Collapse The Incredible Winning Trade In SVXY
  13. Performance Dissected Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower. Commissions reduce the monthly returns by approximately 1-2% per month, depending on the broker and number of trades. As with every trading system which uses multi leg trades, commissions will have a significant impact on performance, so it is very important to use a cheap broker. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. Please refer to How We Calculate Returns? for more details. 2018 was a very different year from the previous years. Despite the increase in volatility, 77% of all SO trades were winners with an average gain of 7.07%. Our model portfolio produced 17.3% return in December 2018 while most major indexes were down double digits. We proved once again that our strategies can make money in any market, bull, bear or sideways. Our strategies SteadyOptions uses a mix of non-directional strategies: earnings plays, Straddles, Iron Condors, Calendar Spreads, Butterflies etc. We constantly adding new strategies to our arsenal, based on different market conditions. SO model portfolio is not designed for speculative trades although we might do some in the speculative forum. SO is not a get-rich-quick-without-efforts kind of newsletter. I'm a big fan of the "slow and steady" approach. I aim for many singles instead of few homeruns. My first goal is capital preservation instead of doubling your account. Think about the risk first. If you take care of the risk, the profits will come. Looking at specific strategies, reverse iron condors were our best performing strategy, producing 31.0% average return with 100% winning ratio. We started using the RIC and BWB strategies later in the year during times when VIX was high (20+). We will continue trading what works the best and adapt to the market conditions. What's New? We continue expanding the scope of our trades beyond the earnings trades, Iron Condors and calendars. We are now trading SPY, TLT, VIX, VXX, XLV and other ETFs to diversify the portfolio. When Implied Volatility spiked, we added RIC and BWB strategies to our arsenal. We will continue refining those strategies to get even better results. This gives members a lot of choice and flexibility. We launched a Creating Alpha service that trades exclusively VIX based products and TLT. It includes two separate model portfolios at very low introductory price. Our long time mentor @Yowster started contributing trades to our official model portfolio. This allowed us to expand the quantity and the quality of our trades, sometimes providing a slightly different angle and perspective. Our members now get official trades from two traders for the price of one! This means more selection and more diversity. We have implemented more improvements to the straddle strategy that reduces risk and enhances returns. As a result, the strategy produced highest average gain percentage and highest percentage of winning trades since inception. We started using the CMLviz Trade Machine to find and backtest some of our trades. This is an excellent tool that already produced few nice winners for us. What makes SO different? First, we use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night. Second, our performance is based on real fills. Each trade alert comes with screenshot of my broker fills. Many services base their performance on the "maximum profit potential" which is very misleading. Nobody can sell at the top and do it consistently. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage. It is not a coincidence that SteadyOptions is ranked #1 out of 704 Newsletters on Investimonials, a financial product review site. Read all our reviews here. The reviewers especially mention our honesty and transparency, and also tremendous value of our trading community. We place a lot of emphasis on options education. There is a dedicated forum where every trade is discussed before the trade is placed. We discuss different strategies and potential trades. Unlike most other services that just send the trade alerts, our members understand the rationale behind the trades and not just blindly follow the alerts. SO actually helps members to become better traders. Other services In addition to SteadyOptions, we offer the following services: Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors. Steady Condors - Hedged monthly income trades managed by the Greeks. Creating Alpha - Volatility products like VXX and UVXY plus TLT portfolio. LC Diversified Portfolio - broadly diversified, absolute return, multi-strategy portfolio. We now offer a 4 products bundle (SteadyOptions, Steady Condors, Anchor Trades and Creative Alpha) for $745 per quarter or $2,495 per year. This represents up to 50% discount compared to individual services rates and you will be grandfathered at this rate as long as you keep your subscription active. Details on the subscription page. Subscribing to all 4 services provides excellent diversification since those services have low correlation, and you also get the ONE software for free for 12 months with the yearly bundle. The LCD is our most diversified and scalable portfolio, I highly recommend that members check it out. It is offered as an added bonus of all subscription plans. We also offer Managed Accounts for Anchor Trades and LCD. Summary 2018 was another remarkable year. Our members enjoyed triple digit gains while US stocks posted its worst year in a decade. SteadyOptions is now 7 years old. We’ve come a long way since we started. We are featured on Top 100 Options Blogs by commodityhq, Top 10 Option Trading Blogs by Options trading IQ, Top 40 Options Trading Blogs, Top 15 Trading Forums and more. I see the community as the best part of our service. I believe we have the best and most engaged options trading community in the world. We now have members from over 50 counties. Our members posted over 110,000 posts in the last 7 years. Those facts show you the tremendous added value of our trading community. I want to thank each of you who’ve joined us and supported us. We continue to strive to be the best community of options traders and continuously improve and enhance our services. Let me finish with my favorite quote from Michael Covel: "Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between." If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee. Happy Trading from SO team!
  14. Well, every trade should be put in context. Before evaluating a trade (or an options strategy), the following questions should be asked and answered: What is the holding period of the strategy? What is the maximum risk? What is the profit potential? What is the average return? What is the winning ratio? Why holding period is important? Well, making 5% in one week is not the same as making 5% in six months. In the first case we are talking about 250% annualized return. In the second case, 10%. See the difference. Maximum risk is important because it doesn't make sense to aim for 5% gain if your strategy can lose 50-100%. For example, when you are trading a directional strategy, and the stock gaps against you, the losses can be catastrophic. Since the risk is high, you should aim for higher return to compensate for the risk. However, if your maximum risk is limited, you can aim for lower return and still get excellent overall performance. Lets examine our pre-earnings straddles as an example. As a reminder, a long straddle option strategy is vega positive, gamma positive and theta negative trade. It works based on the premise that both call and put options have unlimited profit potential but limited loss. Straddles are a good strategy to pursue if you believe that a stock's price will move significantly, but unsure as to which direction. Another case is if you believe that Implied Volatility of the options will increase - for example, before a significant event like earnings. I explained the latter strategy in my Seeking Alpha article Exploiting Earnings Associated Rising Volatility. IV usually increases sharply a few days before earnings, and the increase should compensate for the negative theta. If the stock moves before earnings, the position can be sold for a profit or rolled to new strikes. This is one of my favorite strategies that we use in our SteadyOptions model portfolio. This is how the P/L chart looks like: How We Trade Straddle Option Strategy provides a full explanation of the strategy. Lets take a look at 2017 statistics for this strategy: Number of trades: 77 Number of winners: 62 Number of losers: 15 Winning ratio: 80.5% Average return per trade: 5.1% Average return per winning trade: 8.7% Average return per losing trade: -10.2% Average holding period: 7.2 days Lets do a quick math. If you can do 10 trades per month, each trade producing 5% gain on average and 10% allocation per trade, your monthly return is 5% on the whole portfolio. That's 60% non compounded annual return, with minimal risk. To answer the original question: for a strategy that has 80% winning ratio and loses on average 10% on losing trades, with average holding period of one week, 5% is an EXCELLENT return. In fact, I would consider it as Close to the Holy Grail as You Can Get. Related Articles: How We Trade Straddle Option Strategy Buying Premium Prior to Earnings Can We Profit From Volatility Expansion into Earnings Long Straddle: A Guaranteed Win? Why We Sell Our Straddles Before Earnings
  15. Colibri Trader

    4 Levels of Trading Experience

    So, let’s have a deeper look into those options trading experience levels and what they really are. Level 1- The Beginner This stage starts when you realize there is a way to make money while staying at home. At this stage you are probably neither aware of the dangers of trading nor of where to start looking to understand trading. In this stage you are full of enthusiasm and want to conquer the world. In this stage, you are starting to realise that more money can be made through leverage and you underestimate all of the dangers that trading on margin carries. This is the stage that probably 20-30% of “traders” are quitting. Level 2- The Student The second level of trading is the learning period. In this period, you are trying to lay your hands on literally everything that is trading related. This is anything from trading articles, free e-books, hard-copy books to paid courses. You are starting to realize what an immense field trading is and how difficult to grasp it is. In this level of trading you realize that you need to choose the right trading strategy. This should be a strategy that preferably fits your personality. You start asking yourself questions like: Should I be a day trader? Maybe, I will be better off as a long-term position trader or swing-trader. What would be the best strategy to fit in my daily agenda. This is the level where you are also asking yourself- can I do this part time, or I should quite my job to start trading full-time. This is also the level of trading in which you are jumping from one trading strategy to another. You are too eager to realise that one of your trading buddies has just mastered a different trading approach and you are too excited to try it out. The trader inside of you is not really paying attention to money management or risk management. You just want to make “big bucks” and preferably quick. This is also the stage that probably 30-40% of the “traders” are dropping out. Level 3- Tenbagger Trader “Tenbagger” is a term introduced by the famous investor Peter Lynch. It is usually used to describe an investment that grows ten-fold. This is the level of trading, in which a trader has finally mastered how to hold a position longer. He/she are not making the same silly mistakes that they used to before. Now is the time to really shine and start bragging in front of your colleagues and friends. Maybe time has come for you to consider quitting your boring job and working full-time as a trader. Or maybe you can send your track record to one of the prop trading houses and ask to join them. The world is your oyster and you are asking yourself how come you did not start trading earlier in your life. You are tapping yourself on the shoulder and start thinking if time has come to consider other types of investments. Maybe you can re-invest; or possibly you can find another hobby. This is the level of trading in which you are asking yourself the question if you should start your own trading blog and share your strategy. It is all great until you wake up one morning and you realize that you were exposed too heavily and received a margin call. You feel like it is the worst day in your life. You want to cry (and you probably do) and start blaming yourself how stupid you were. This is the level of trading, in which you are releasing how important risk/money management is and how underestimated in your trading strategy it was. This is also a stage in which another 20-30% will call it a day. Level 4- The Five Percenters (a.k.a. 5%ers) 15 years ago I read somewhere that only 5% of traders really make it. I am not sure whether this percentage is right or is more like 0.5%. What is really true is that only a fraction of traders do really make it to this level of trading experience. Reaching this level does not mean that you will never fall back. There is no guarantee that you will be a 5%er forever. It means though that you have learnt the ropes of trading and know how to manoeuvre in the deep waters of this ocean. Being a 5%er means that you have showed stronger character than the majority of other players and you can finally tap yourself on the shoulder. But you don’t do it. You don’t do it, because you have learnt the hard way that the more you brag about it or the more excited you become can bode only one thing- losing your 5%er status. Being a great trader is not a natural talent. It is a skill that traders develop over the years. Being a 5%er means that you not only know where to take profit; more important than that- you know where to cut a losing trade. This level of trading teaches you that to know how to live in the unknown. Trading on this level means that you can watch the screen and still be objective. Being a 5%er means that you can hold a bit longer until price finally reaches your target. On this level of trading you are not thinking about trading systems anymore. You have turned into a risk:reward calculator and a pattern-recognition machine. You are never again afraid of not taking this or that trade. At the same time, you are never too afraid to enter in a trade slightly later. You are just a master trader. CONCLUSION What is your level of trading? Are you sure trading is for you? Trading is a field that makes you or breaks you. Every day is different and you need to be flexible enough to understand that. In this article I shared some of my thoughts about trading in 4 levels. Sometimes being a beginner is closer to the 5%er than you think. Feel free to share your comments in the section below. About the author: Colibri Trader is a price action trader that is constantly looking for the apha. In the meantime, he does not forget to enjoy life, travel and even mentor other traders. This article was originally published here.
  16. The Lazy Trader

    Why not do it yourself?

    Sorry to disappoint, nothing new to reveal. Let's start with the most criticized villains: hedge funds. According to Barclay (tracking more than 2,000 hedge funds), the average Hedge Fund return in 2015 was +0.04%. Of course, this is before management fees and everything else. More details here. It is a common practice in the industry to use the 2-20 scheme, meaning 2% management fee on your assets, plus 20% of your gains in the year. Needless to say, the average guy lost money. Let's move on to the second most criticized villain: mutual funds For mutual funds I decided to go with a sample of one of the most representative institutions when it comes to wealth management: RBC. I took a look at some of the most popular funds, those with catchy words in the name like "Balanced", "Value", "Global", "Income", "Growth". RBC Balanced Fund: 2015 return: +0.8%. Avg since inception: +6.4% annually. Management Fee: 2.16%. RBC Global Balanced Fund: 2015 return: +4.1% (Hey not too bad!! ) Avg since inception: +4.2% annually. ( Oh, well ) Management Fee: 2.21% RBC Monthly Income Fund: 2015 return: -3.4%. Avg since inception: +6.8% annually. Management Fee: 1.20%. RBC North American Growth Fund: 2015 return: +1.6%. Avg since inception: +7.5% annually. Management Fee: 2.09% RBC North American Value Fund: 2015 return: -0.3%. Avg since inception: +7.3% annually. Management Fee: 2.10% If we average out those 2015 returns, we have +0.56% among these 5 big pools. Never forget the average management fee is around 2% per year. Since inception, they average about 6% annual returns (not too bad), but the 2% management fees turn it into 3% to 4% real returns after fees.....so when you factor in inflation,... yes, you guessed it. Finally the least hated, in fact most times venerated index funds: I just kept it simple with the super popular VTI (Vanguard Total Stock Market ETF) VTI's price at the beginning of the year was 105.94 vs 104.34 at the end of the year. With the addition of distributions it finishes the year slightly positive. According to Morning Star the total return in 2015 was +0.36% for VTI. Not beating the simple strategy of holding SPY is something I won't criticize in this article. I have talked about that before. I myself have under-performed the market in some periods in the past. However, one thing must necessarily be said: If these funds were delivering inferior returns BUT were protecting investors from severe corrections, then we could argue that they have a mission, that they play a vital role: They under-perform in exchange for protecting investors from serious corrections. It's the price to pay in order for our money to be safe. Yet, that's generally very far from being true. Most mutual/hedge funds generally under-perform during market rallies, and over-correct during market sell-offs. In addition, you are not protected against crashes, looking at the history of most mutual funds in 2008, they corrected between 30% and 60%, some even more. And I'm saying "most", not "all" simply because many mutual funds that we have today hadn't been born back then. This naturally leads people to think: "what the hell! I'm going to passively follow an index". It seems to be slightly better than giving your money to a Mutual Fund or Hedge Fund, but not by much. The index will not save you from the corrections and bear markets. And the saddest part of the story is that you are guaranteed to ALWAYS under-perform. It is mathematically impossible to match the index that you follow, whichever it is. Why? Well, to start off the vehicles you invest in in order to follow the index have a management fee. Yes, usually small, but still a management fee. That alone is enough to guarantee under-performance in respect with the index. Then you also have execution slippage, Bid-Ask differential. That, eats up a little more. Finally, you have trading costs, a.k.a commissions you pay your broker for facilitating the actual buying and selling of shares. When all this is included, index followers usually under-perform the index by 1% to 2% in the long run. As of this writing, VTI's average annual performance since inception is +5.88%. As explained earlier, the investor is guaranteed to be getting less than that. Why not do it yourself? Saying that nobody will take care of your money better than yourself is so cliche. But man it is so damn true. Yes, most individuals under-perform, but most individuals do not put the effort to improve their skills, to learn solid trading approaches with better historical risk-adjusted returns. Most people under-perform, but you are not "most people". Imagine what this world would be if every successful person stopped fighting and improving just because "the majority fails". What would Lebron be if at some point he'd stopped to think: "Why bother? Most aspiring basketball players don't make it to the NBA". What if Joe Di Maggio had said: "Screw it. I'm not even going to make the effort. Most baseball players never get to play Major League Baseball". Every successful entrepreneur, every successful musician, every successful writer, surgeon, engineer...Mathematically speaking, they all started with huge odds against them, just based on the results of the general population. Most people are lazy by nature, and prefer to invest their time browsing pictures of hot photo-shopped girls on Instagram. You are not like "most people". Even if you browse for some hotties on the Internet, the single fact that you are reading this site demonstrates you are not like "most people". After all, it takes a special kind of liver to be able to read this annoying site for a prolonged period of time. Why not grow your money yourself, with calculated risks and action plans instead of the constant nervousness produced by the concerns that the markets will always crash tomorrow and I have no idea how the hell my fund manager will react? Why significantly reduce your returns due to paying someone for the privilege of this constant fear? The numbers, the numbers don't lie. This article was originally published here by Henrik aka The Lazy Trader. Henrik trades Iron Condors, Credit Spreads, Dividend Growth investing, Cash Secured Puts, Covered Calls, ETF Rotation, Forex. He likes to share his passion with others, educate and learn something from everybody. You can follow Henrik on Twitter.
  17. I can guess that many people in this industry are getting this question. Today I got an email from Matthew Klein, CEO of Collective2.com, where he provides some excellent and perfectly logical explanation. Here are some major points. “Why would a good trader share his strategy?” That’s the question, then, isn’t it? If you create a good trading strategy, why let other people use it for a modest amount of money, rather than keeping it all to yourself? Actually, there are several reasons. Leverage and risk The same question can be asked of virtually the entire financial industry. Why do top-tier hedge funds accept investor money? If the guys at Two Sigma are so smart (and they are), why don’t they just trade their own money from an unmarked building in Soho? Why go through the hassle of raising capital from investors? Or more broadly, why have mutual funds? Why run a bond fund? If Bill Gross is such a genius (and he is), why does he bother accepting investor money, and suffering the indignity of annoying questions, or unfortunate P.R.? Why not trade his own private capital from his house in Laguna Beach, and when people ask him what he does for a living, he can just say, “I’m a beach bum. I don’t do anything.” The answer is: leverage (people want more of it) and risk (people want less of it). Even Masters of the Universe don’t have infinite cash sitting around. After all, many Hedge Fund Titans live in New York City: there are co-ops to buy, kids to private-school, restaurants to patronize. If you are a managing director at a top-tier hedge fund, and you have a million dollars in the bank, ready to invest, which would you prefer: to earn 20% on your money? Or 30%? Letting other people invest alongside you, and making money on their money, is a form of leverage. (For those not fluent in finance: leverage means using borrowed money to make more money.) Leverage isn’t always a good thing, of course (you can lose more, too) — but if you have high confidence in your trading ability, using leverage can be a wise decision. If you are a competent trader, and you have $100,000 sitting in your brokerage account, ready to trade, which would you prefer: to earn 20% on your money? Or 30%? Imagine you are a good trader, and you think that you can earn 20% each year on your $200,000 trading nest egg. Now imagine that selling your strategy on lets you earn an extra $5,000 each month in subscription fees from your followers. That’s the equivalent of another 30% on your capital. Sure, there’s no guarantee you will earn that, but if you build a good track record on, you can earn that much, and more. So, just like a Hedge Fund Titan — or just like a mutual fund manager — you can gain “leverage” on your own dollars by opening your strategy to the public. Reducing Risk Allowing outside investors to trade alongside you, and pay you a fee, also reduces your risk. Let’s be honest about that. A typical hedge fund charges “2-and-20” — which means they charge an investor a fee of 2% of the money invested with them, plus 20% of the investor’s profits. That 2% is charged no matter what — whether the fund wins or loses. It’s called a “management fee,” and in theory it’s meant to cover fixed expenses that happen every month at a hedge fund, no matter what: you know, rent, administrative assistants, legal and accounting, blow. But money is fungible, and what you pay with one set of dollars is something you don’t have to pay with another set of dollars. One way to think of that 2% management fee is as a risk-reduction cushion. If trading doesn’t work so well in one month, you still get your 2%. When you’re managing a billion dollars, that’s a nice chunk of change. Now, listen, if you stink up the place six months in a row, most investors will flee and take their 2% management fee with them. But you’ll get a bit of leeway — more so if you have a long and distinguished track record behind you. That leeway reduces your risk. That’s what you gain by offering your strategy to other people, instead of just trading it alone. Building your career So far, I’ve discussed the financial reasons why a legitimate, talented trading-strategy creator would sell his system. But there’s another reason, which is not related to money, but, rather, to career development. Finance is a hard industry to break into. We’ve all read about the glamorous life of hedge fund managers, but how exactly does one go about getting a job at a hedge fund? You don’t fill out an application online, and — truthfully — unless you go to a top-five American university, you won’t see the face of a recruiter at your annual career fair. I’ve already written about how stupid hedge-fund hiring practices are. But indignation won’t change the world. The fact is, it’s ridiculously hard to get a job at a hedge fund, and in finance in general, and probably always will be. But there’s one thing “finance people” respect, and that’s money. Prove you can make it for them, and it doesn’t matter one bit whether you went to Harvard or Pomona State. Money talks. Running a public track record, with other people’s money at stake, is a different beast than sitting alone in your room, wanking your own tiny brokerage account. The pressure makes some people crack. On the other hand, some people love performing in public — whether the performance is musical, or written… or financial. Some people share their strategies with the public for reasons other than money: they are building their career, buffing their resume, trying to break into the business. SteadyOptions Not all those reasons are applicable to SteadyOptions, but some are. But even if you don't buy any of those reasons, the only question you have to ask yourself: is the subscription service helpful to you? Does it help you to become a better trader? Does it help you to make money? If the answer to those questions is yes, this is the only thing that should matter to you. Why am I doing this is secondary. Happy trading!
  18. GavinMcMaster

    How Much Do You Need To Trade Options?

    I was speaking to one trader the other day who had a $20,000 win with his first trade. I explained that this was almost the worst thing that could happen, because he started thinking “this is easy” and “if I can make this much when I don’t know anything, imagine what I can do when I get some more experience.” Sure enough, this trader blew up his account not long after. He was taking on too much risk without knowing how to handle it. For new traders, it is much better to start with a small account size. Even if you have $200,000 available for trading options, just start with $10,000 and get a feel for how things work. Then, when you’ve been trading for a year or so, SLOWLY build your account from there. You don’t want to jump from $10,000 to $200,000 overnight. The psychological aspect of trading a $200k account is much different to a $10k account. All of a sudden a 1% loss has gone from $100 to $2,000. So, the big question is how much do you need to get started trading options? I believe there is no real minimum. You can start trading with $200. The experience you gain will be with you for a lifetime, so the earlier you get started the better. That being said, there are certain strategies that will not be available to you with only a small amount of capital. Iron condors for example will be hard to trade with less than $5,000. Also, you need to keep in mind that commissions and fees are going to have a much larger impact on a small account. Ideally, you want to have around $5,000 to $10,000 at a minimum to start trading options.Call Course HOW TO TRADE OPTIONS FULL-TIME To become a full-time options trading requires a big commitment both financially and mentally. As the old saying goes, “It’s the hardest way there is to make easy money”. Trading is hard, there will be good times and bad times. Will you be able to handle the emotional upheaval the bad times can cause? The first step to figuring out if you can go full-time, is to figure out how much you need to live off. If you want to make it as a trader, you need to be prepared to live pretty frugally. We’ve all seen the images of hot shot traders driving Ferraris, but that’s not the reality for 99% of traders out there. Most full-time traders I know live very frugally. First things first, you should audit your spending behaviour and see if there is anywhere you can cut back without sacrificing your lifestyle. The next step is to build a track record over a few years and figure out what sort of return you can expect on a consistent basis. It would be good to have this track record through a variety of different market conditions. There are a lot of “bull market geniuses” out there right now, but how will they fare during the next bear market? Let’s say you’re pretty confident that you can achieve 15% per year. If you can live off $50,000, then you need a capital balance of $333,333.33. If your results indicate you can only achieve a 10% return then you need $500,000 but if you can achieve a 20% return then you only need $250,000. You can see there is a massive variation in the amount of capital needed depending on your returns. The best bet is to build that track record and figure out what sort of return YOU can achieve. Every trader is different after all. Also note, that I haven’t met many traders consistently earning over 20% per year (despite what all those internet ads tell you), and I’ve met A LOT of traders in the last 15 years. Your Options Trading DEALING WITH LOSING MONTHS Losing months are never fun for any trader, but they are a double whammy for full-time traders. Not only has your account balance gone down, you’ve also had to withdraw funds to live off. So your account has taken a double hit, and now you need an above average return next month. Can you handle that kind of stress? Having a minimum account size that you’re aiming for is a great idea, but it might be worth waiting until your balance is a little higher than you think you need in order to safely handle those losing months. Some traders will have 12 months’ worth of expenses set aside (outside their trading account) before making the jump to full-time. Trading is a tough game, and if you’ve got the added pressure of needing to make a certain return to put food on the table only adds to that stress. Having some emergency funds put aside can help you focus on the business of trading. ADDITIONAL EXPENSES One thing a lot of people don’t consider is the additional expenses that can be incurred as a trader. Does your current employer cover your health insurance? Do they pay for your smartphone? Do they provide you with a fast computer? A gym membership? All these things and more will be your responsibility going forward. If your computer breaks and you don’t know how to fix it, you need to pay a computer guy to fix it for you. Previously your employer would take care of all of this. Same goes for your phone etc. Be prepared for some additional expenses when you work for yourself.Implied Volatility Calculator CONCLUSION Hopefully I haven’t stressed you out too much, but the reality is, you need a significant amount of capital before even thinking about becoming a full-time trader. Those of you who have $50,000 and think you can go full-time, I’m sorry but it’s just not going to happen. Unless you’re a single guy who can live the backpacker lifestyle in Thailand. But, trading is one of the most rewarding jobs there is. No boss, work from home, travel, the list goes on. Stick at it, take it step by step and slowly build your account, and you will get there. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. He launched Options Trading IQ in 2010 to teach people how to trade options and eliminate all the Bullsh*t that’s out there. You can follow Gavin on Twitter.
  19. Here are just a few of the shattered risk-related records, a sample of 3 each for the Dow and S&P: Dow: Dow Industrials intraday volatility, lowest on record (95% of days in 2017 had less than a 1% Dow intraday move) Dow Industrials greatest number of days in history without a 1% move (72) Dow Industrials closed at new all-time highs a record 71 times in 2017 S&P 500: S&P 500 annualized volatility of 3.9%, lowest on record S&P 500 Total Return Index gained in every month of 2017, and ended the year at a record 14 consecutive up months S&P 500 ended the year with a record 289 consecutive days without a 3% pullback VIX: Lowest intraday level in history (8.84 on 7/26/17), Lowest daily close (9.19 on 10/5/17), Lowest weekly close (9.36 on 7/17/17), and Lowest monthly close (9.51 on 9/29/17). 2017 also serves as a reminder that future is unknown. Nobody was predicting this to be the least volatile year in modern history. They were predicting just the opposite, in fact, even after the year had already begun… Additionally, US equities have now posted positive returns for nine straight years, tying the record from 1991-1999. I could go on and on, but you get the idea. Some years from now, we'll look back and agree that 2017 was the "exception that proves the rule," and that risk indeed still exists, and must be dynamically managed for long-term success. In my firm, all of our strategies include dynamic risk management, either in the form of option hedging with our Anchor strategy or with trend following rules that react to weakness in equity prices by partially or entirely exiting positions to protect capital. After all, do we demand that the fire department be disbanded as a waste of time and money when a neighborhood experiences a year with no fires? Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital. 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™. 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 is managing the LC Diversified portfolio and forum, the LC Diversified Fund, as well as contributes to the Steady Condors newsletter.
  20. Performance Dissected Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower. Commissions reduce the monthly returns by approximately 1-2% per month, depending on the broker and number of trades. As with every trading system which uses multi leg trades, commissions will have a significant impact on performance, so it is very important to use a cheap broker. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. Commissions reduce the monthly returns by approximately 2% per month, depending on the broker. Please refer to How We Calculate Returns? for more details. 2017 was probably our most consistent and steady year. Our strategies SteadyOptions uses a mix of non-directional strategies: earnings plays, Iron Condors, Calendar spreads etc. We constantly adding new strategies to our arsenal, based on different market conditions. SO model portfolio is not designed for speculative trades although we might do some in the speculative forum. SO is not a get-rich-quick-without-efforts kind of newsletter. I'm a big fan of the "slow and steady" approach. I aim for many singles instead of few homeruns. My first goal is capital preservation instead of doubling your account. Think about the risk first. If you take care of the risk, the profits will come. Looking at specific strategies, pre-earnings calendars were our best performing strategy, producing 13.8% average return with 84% winning ratio. We will continue trading what works the best and adapt to the market conditions. What's New? We continue expanding the scope of our trades beyond the earnings trades, Iron Condors and calendars. We are now trading SPY, TLT, VIX, VXX and other ETFs to diversify the portfolio. We will continue refining those strategies to get even better results. This gives members a lot of choice and flexibility. We launched a PureVolatility portfolio that trades exclusively VIX based products. It is currently included as bonus in SteadyOptions subscription. We have implemented some improvements to the straddle strategy that reduces risk and enhances returns. We introduced a Mentoring Program where experienced members help newer members to get up to speed. The mentors provide guidance and answer questions on the forum. We introduced an "Unofficial Trades" forum where veteran members share their trading ideas that don't make it into the official portfolio for various reasons. There are dozens unofficial trading ideas every month. We started using the CMLviz Trade Machine to find and backtest some of our trades. This is an excellent tool that already produced few nice winners for us. What makes SO different? First, we use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night. Second, our performance is based on real fills. Each trade alert comes with screenshot of my broker fills. Many services base their performance on the "maximum profit potential" which is very misleading. Nobody can sell at the top and do it consistently. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage. It is not a coincidence that SteadyOptions is ranked #1 out of 704 Newsletters on Investimonials, a financial product review site. Read all our reviews here. The reviewers especially mention our honesty and transparency, and also tremendous value of our trading community. We place a lot of emphasis on options education. There is a dedicated forum where every trade is discussed before the trade is placed. We discuss different strategies and potential trades. Unlike most other services that just send the trade alerts, our members understand the rationale behind the trades and not just blindly follow the alerts. SO actually helps members to become better traders. Other services In addition to SteadyOptions, we offer the following services: Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors. Steady Condors - Hedged monthly income trades managed by the Greeks. LC Diversified Portfolio - broadly diversified, absolute return, multi-strategy portfolio. All services produced double digit returns in 2017. We now offer a 3 products bundle (SteadyOptions, Steady Condors and Anchor Trades) for $745 per quarter or $2,495 per year. This represents up to 40% discount compared to individual services rates and you will be grandfathered at this rate as long as you keep your subscription active. Details on the subscription page. Subscribing to all three services provides excellent diversification since those services have low correlation, and you also get the ONE software for free for 12 months with the yearly bundle. The LCD is our most diversified and scalable portfolio, I highly recommend that members check it out. It is offered as an added bonus of all subscription plans. We also offer Managed Accounts for Anchor Trades and LCD. Summary Overall it has been an excellent year for us. SteadyOptions is now 6 years old. We’ve come a long way since we started, but we still have a long ways to go. We are featured on Top 100 Options Blogs by commodityhq, Top 10 Option Trading Blogs by Options trading IQ, Top 40 Options Trading Blogs by feedspot and more. I see the community as the best part of our service. I believe we have the best and most engaged options trading community in the world. We now have members from over 50 counties. Our members posted over 4,400 topics and ~100,000 posts in the last 6 years. Those facts show you the tremendous added value of our trading community. I want to thank each of you who’ve joined us and supported us. We continue to strive to be the best community of options traders and continuously improve and enhance our services. Let me finish with my favorite quote from Michael Covel: "Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between." Subscription is now open to new members for a limited time. If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee. Happy Trading from SO team!
  21. Performance Dissected It is important to mention that those numbers are pre-commissions, so your actual results will be lower. As with every trading system which uses multi leg trades, commissions will have a significant impact on performance, so it is very important to use a cheap broker. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. Commissions reduce the monthly returns by approximately 2-3% per month, depending on the broker. Please refer to Performance Dissected topic for more details. We had few rough months in 2016. The main reason is that we started implementing a new strategy that holds trades through earnings. This is a high probability high risk strategy that had very good historical results and probability, but did not work well in 2016. You can read more details here, including the lessons we learned. This strategy was responsible for majority of the losses in Feb-Apr. 2016. Once we realized that the strategy doesn't work well and is higher risk than most members would like, we abandoned it and went back to our time proven strategies. It took us just 5 months to recover, and our model portfolio doubled since April lows. Members who had the discipline and patience to stay the course have been greatly rewarded. To put things in perspective, it was our worst drawdown in 5 years. Despite our best efforts, drawdowns happen in trading, it's part of the game. Despite this drawdown, we still delivered 5 years CAGR of 82.5% (including commissions), while investing only 50-60% of our capital on average. It is important to understand that Drawdowns Are Part Of The Game. All big winners including AAPL, AMZN, GOOG and MSFT had few drawdowns ranging from 65% to 92%. If you sold them, you would not enjoy the gains that followed. Our strategies SteadyOptions uses a mix of non-directional strategies: earnings plays, Iron Condors, Calendar spreads etc. We constantly adding new strategies to our arsenal, based on different market conditions. SO model portfolio is not designed for speculative trades although we might do some in the speculative forum. SO is not a get-rich-quick-without-efforts kind of newsletter. I'm a big fan of the "slow and steady" approach. I aim for many singles instead of few homeruns. My first goal is capital preservation instead of doubling your account. Think about the risk first. If you take care of the risk, the profits will come. We continue expanding the scope of our trades beyond the earnings trades, Iron Condors and calendars. We are trading SPY, TLT, VIX and other ETFs to diversify the portfolio. We will continue refining those strategies to get even better results. This gives members a lot of choice and flexibility. Looking at specific strategies, pre-earnings calendars were our best performing strategy, producing 18.2% average return with over 80% winning ratio. We will continue trading what works the best and adapt to the market conditions. What makes SO different? First, we use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night. Second, our performance is based on real fills. Each trade alert comes with screenshot of my broker fills. Many services base their performance on the "maximum profit potential" which is very misleading. Nobody can sell at the top and do it consistently. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage. It is not a coincidence that SteadyOptions is ranked #1 out of 704 Newsletters on Investimonials, a financial product review site. Read all our reviews here. The reviewers especially mention our honesty and transparency. We place a lot of emphasis on options education. There is a dedicated forum where every trade is discussed before the trade is placed. We discuss different strategies and potential trades. Unlike most other services that just send the trade alerts, our members understand the rationale behind the trades and not just blindly follow the alerts. SO actually helps members to become better traders. Other services In addition to SteadyOptions, we offer the following services: Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors. Steady Condors - Hedged monthly income trades managed by the Greeks. LC Diversified Portfolio - broadly diversified, absolute return, multi-strategy portfolio. The LCD is our most diversified and scalable portfolio, I highly recommend that members check it out. It is offered as an added bonus of all subscription plans. We also offer Managed Accounts for Anchor Trades and LCD. Let me finish with my favorite quote from Michael Covel: "Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between." Subscription is now open to new members for a limited time. If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee. Happy Trading from SO team!
  22. And while it was easy to pretend trade for years and years as long as the Fed injected trillions into the "market", levitating stocks every higher, lately it has been far more difficult, not only for real trader, but also for "paper traders" too. Case in point, "stock trading whiz kid" Manuel E. Jesus, aka "Manny Backus" - and apparent chess prodigy based on his photo - and his newsletter company Wealthpire Inc. There was just one problem for Manuel Jesus, aka "whiz kid" - he was a fraud, at least according to the SEC, which announced "that a self-proclaimed “stock trading whiz kid” and his stock newsletter company in Los Angeles have agreed to pay nearly $1.5 million to settle charges that they defrauded subscribers through false statements and misrepresentations." “Investors who subscribe to trading alert services are relying on the purported expertise and success of those making the stock recommendations, but Wealthpire and Backus instead circulated repeated lies and falsehoods,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. The SEC complaint against Manny Backus didn't come as a surprise to me. All I needed was five minutes on his website to smell a fraud. But then I came across this article. The author conducted a survey to see how much (or little) marketers in our community conduct compliance reviews of their marketing materials. "Marketers don't like to talk much about compliance issues. It won't deliver thousands of new customers or millions in new sales. It only gets attention when cases like the one above are announced. But everyone is scared they will mistakenly cross a line, get found out, and be the subject of the next $1.5 million settlement and S.E.C. press release." The author also says that "people are too quick to assume someone is a crook - although there are certainly a fair number of them in every online marketing industry. In my (biased) opinion, in the trading newsletter industry, not "a fair number of them" are crooks. Most of them are crooks. Just look at some the claims you see from those promoters: I turned $12,415 Into $4,155,000 trading penny stocks. 2,062% Weekly Option Gain. Turn $3,000 Into $100,000 in 4 months. I made 29,233% in 12 months trading high flying Internet stocks. We averaged 127.16% Per Month trading credit spreads. We guarantee that our options trading strategies will make you profitable every month. 99% of my recent 326 stock picks have been winners. Trading $150,000 into $650,000 in 8 months. How Jack turned $250 into $16,000 in Just One Month. +9,651.04% day trading return since Jan. 4 2016. Of course none of them has ever provided any proof of those returns. As Bloomberg article correctly concluded, their self-promotional strategies have made them richer than trading ever did. Here is the problem: like Manny Backus, most of them are not real traders. They are promoters. They need to lie because they don't have anything real to back their claims. So yes, if you lie, you need to conduct compliance reviews of your marketing materials. You need a lawyer to protect you. If you are a real trader and your "marketing materials" just present your real trading results, you don't really need a lawyer. I know which category SteadyOptions team belongs to. Do you know which category your "guru" belongs? Is he a trader or a promoter? Will he be the subject of the next $1.5 million settlement and S.E.C. press release? Related articles: 10 Signs Of A Fake Guru Can You Really Turn $12,415 Into $4M? Can you double your account every six months? Performance Reporting: The Myths and The Reality SchoolofTrade: Another Guru Busted Want to learn how to trade successfully from real traders? Start Your Free Trial
  23. Pension Partners published an excellent study about relation between big winners and big drawdowns. Big Winners And Big Drawdowns By Charles Bilello of Pension Partners Apple, Amazon, Microsoft and Alphabet… All among the largest and most revered companies in the world. All have returned unfathomable amounts to their shareholders. All have experienced periods of tremendous adversity with large drawdowns. When thinking about big winners in the stock market, adversity and large drawdowns probably aren’t the first words that come to mind. We tend to put the final outcome (big long-term gains) on a pedestal and ignore the grit and moxie required to achieve that outcome. But moxie is the key to long-term investing success, for there is no such thing as a big long-term winner without enduring a big drawdown along the way… Apple has gained 25,217% since its IPO in 1980, an annualized return of 17%. Incredible gains, but these are just numbers, masking the immense pain one would have endured over time. Apple investors from the IPO would experience two separate 82% drawdowns, one from 1991 to 1997 and another from 2000 to 2003. Amazon has gained 38,882% from its IPO in 1997, an annualized return of over 36%. To put that in perspective, a $100,000 investment in 1997 would be worth just under $39 million today. Breathtaking gains, but they were not realized without significant adversity. In December 1999, the initial $100,000 investment would have grown to $5.4 million. By September 2001, less than 2 years later, this $5.4 million would shrink down to $304,000, a 94% drawdown. It took over 8 years, until October 2009, for Amazon to finally recover from this drawdown to move to new highs. Bill Gates is the richest man in the world, having amassed his $80 billion fortune as the founder of Microsoft. Microsoft has returned 25% a year over the past 30 years, a remarkable feat. The path to riches in Microsoft looks deceptively easy on the surface. The calendar year returns from its IPO in 1986 through 1999 were incredibly high and consistent, masking significant underlying volatility. In 1987 Microsoft advanced 123% but would suffer more than 50% decline in October during the stock market crash. It would not recoup those losses for two years, until October 1989. Its largest drawdown in history occurred over a 10 year period, a 70% decline from 1999 through 2009. Alphabet (formerly Google) has been one of the great growth stories in recent history, returning 26% per year since its IPO in 2004. It did not achieve these returns, though, in a straight line. Its largest drawdown: a 65% decline from 2007 through 2008. It should be clear from these four examples that large drawdowns are an inevitable part of achieving high returns. If you haven’t yet experienced such a gut-wrenching decline, then you probably haven’t owned something that has appreciated 10x, 20x or more. Or you simply haven’t been investing for that long. I know what you’re thinking. There has to be a better way. You want that big juicy return but without the big drawdown. Yes indeed, as does everyone else. The problem, of course, is in trying to hedge or time your exposure to big winners, you will likely miss out on a substantial portion of the gains. Or your emotions will cause you to sell at precisely the worst time (after a large drawdown). Your volatility and drawdown profile may be lower, but that tradeoff will come at a price. As I wrote earlier this year the price for hedge fund investors seeking lower volatility/drawdown in equities has not been a small one, with the HFRX Equity Hedge Index (an investable index of Long/Short equity funds) posting a negative return since 2005 while the S&P 500 has more than doubled. Many investors in these funds were seeking the Holy Grail, a high return (often 15-20% in their “mandates”) with little risk (no large drawdowns). They expected their managers to pick the Apples and Amazons of the investment world without incurring the inherent volatility that comes along with it. As we know, that is a complete and utter fantasy. All big winners have big drawdowns. Accepting this fact can go a long way toward controlling your emotions during periods of adversity and becoming a better investor.
  24. "A lot of folks just look at the return side of the equation," says Wasif Latif, vice president of equity investments for USAA Investments in San Antonio. "But how smooth was your ride to get to that return?" The Sharpe ratio puts those two pieces together. When building a portfolio, the objective is to merge your plan with reality. We want all the return with none of the risk, and it's why a fraud like Bernie Madoff fooled investors for decades. We desperately want to believe in fairy tales, often self-sabotaging our own returns by pursuing unproven complexity over proven simplicity. It's the triumph of hope over experience. For perspective, a Sharpe Ratio of 1 over a long period of time (decades) is extremely rare for any investment or investment portfolio. Just go out and try to find them. Be skeptical of anyone suggesting they can achieve, or have achieved, extraordinarily high Sharpe Ratio's. Here's an example of the Sharpe Ratio of the S&P 500 since 1990: Annualized Return: 9.36% Risk Free Rate (T-bills): 2.87% Annualized Volatility: 14.61% Sharpe Ratio: 0.44 And here's a picture of that reality, from www.portfoliovisualizer.com. One simple way to increase your portfolio's Sharpe Ratio is with diversification. For example, moving half of a portfolio into a bond index fund, and rebalancing annually, has done a nice job of improving your Sharpe Ratio from 0.44 to 0.70 since 1990. Note how much smoother the portfolio growth would have been. Investors would be well served if the finance industry would start showing people a track record instead of simply providing numbers. Just giving investors a bunch of numbers doesn't help them understand the good, the bad, and the ugly of long term investing. At this point, sophisticated investors could get creative and utilize concepts such as synthetic longs with option combos and momentum filters to further maximize risk-adjusted returns, but those are topics for another post and a point to discuss with a competent investment advisor. The point here is to help you think beyond returns to risk-adjusted returns the next time you review your portfolio or a potential investment. The Sharpe Ratio is one proven way to measure how much pain you've historically had to endure in order to achieve a certain gain. Sharpe ratios work best when figured over a period of at least three years, advisers say. Taking our Steady Condors strategy, you might ask yourself: is 17% CAGR (Compounded Annual Growth Rate) a good return? Well, the answer is - it depends. When this return is achieved with only 15% annual volatility - then yes, it's an excellent return. In fact, it is much better than 25% CAGR with 40% annual volatility. Our Performance Page presents Sharpe Ratios for all three our services. We encourage you to check it and compare our Sharpe Ratios to other services (assuming you can even find this info at other services). Related Articles: Are You EMOTIONALLY Ready To Lose? Why Retail Investors Lose Money In The Stock Market Are You Ready For The Learning Curve? Can you double your account every six months? If you are ready to start your journey AND make a long term commitment to be a student of the markets: Start Your Free Trial
  25. Trading Drawdowns Peter Brandt explains: "There is a statistical concept known as the “underwater curve.” The underwater curve plots the time periods when new all-time high NAV levels are being registered (represented by “0” on an underwater curve) and the time periods in which drawdowns are either underway or in recovery back toward new all-time NAV levels. Most successful long-term traders are underwater the majority of time. Welcome to trading!" You are in a drawdown state 80% of the time and of that, you are in a severe drawdown state (greater than -20%) 67% of the time Did you know that Warren Buffett has had multiple 30-50% drawdowns in his career? Yet he is considered one of the greatest investors of all times. False claims by wolves in sheep’s clothing Peter continues: "Successful market speculation is one of the most challenging endeavors one can pursue. Yet, promoters of get-rich- quick-and-easy schemes run rampant in the email and internet worlds. If they are not registered with the SEC, FINRA or the CFTC/NFA or are not personally managing assets of investors they are free to make exaggerated claims. Their advertising is extremely appealing and enticing. Many of these training and trade signaling services claim to have REAL trading track records. But, as far as I am able to determine, none are willing to provide an attestation or audit letter from a national or regional auditing firm that has reconciled their IRS tax payments for trading profits, brokerage statements and bank deposits with their public claims." This is so true. Here are some of the claims I have seen from those promoters: I turned $12,415 Into $4,155,000 trading penny stocks. 2,062% Weekly Option Gain. Turn $3,000 Into $100,000 in 4 months. I made 29,233% in 12 months trading high flying Internet stocks. We averaged 127.16% Per Month trading credit spreads. We guarantee that our options trading strategies will make you profitable every month. 99% of my recent 326 stock picks have been winners. Trading $150,000 into $650,000 in 8 months. How Jack turned $250 into $16,000 in Just One Month. +9,651.04% day trading return since Jan. 4 2016. Of course none of them has ever provided any proof of those returns. As Bloomberg article correctly concluded, their self-promotional strategies have made them richer than trading ever did. Some of those guys claim they live in mansions worth tens of millions, trade tens of millions in their personal account, but at the same time sell trading advisories for $50-100/month. Does it make sense to you? Many times they specifically mention (in fine print) that their performance based on "HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS". Does it mean anything when they don't actually trade? Red flags to Watch in Alert Services Moneyshow listed 10 Red Flags to Watch in an Options Alert Service. Here are some of them: The service doesn’t have any losing trades. The service won’t show you their closed trades. The trades have huge risk. The service inflates their ROI numbers. No detailed track record is posted. The performance is not based on real trades. Here is another HUGE red flag: If the promoter keeps bragging that he lives in a multi million mansion, drives a Lamborghini and has a private jet, run away. Really successful traders are modest and humble. They don't need all this BS. There are also a lot of ways to inflate your track record numbers, as I described in my article Performance Reporting: The Myths And The Reality. Some of them include: Basing performance on "Maximum profit potential". Calculating gains based on cash and not on margin Presenting "Cumulative return". Holding losing positions indefinitely. Resetting past returns after a large drawdown. And more. Those who want to find out more details about some of those scammers, I highly recommend reading real and objective reviews by Emmett Moore from tradingschools.org. Emmett also describes how some of them game the system and make their profits look real. Fascinating read, highly recommended. SteadyOptions lists all its trades on our performance page, winners and losers. The details of all trades are available on the forum with screenshots of our fills and can be verified with historical prices. Van Tharp says successful trading/investing is 60% psychology...only 60%? Humans desperately want to believe there is a way to make money with no or little risk. That’s why Bernie Madoff existed, and it will never change. Best luck with your investments. Related articles: Can you double your account every six months? How to Calculate ROI in Options Trading Performance Reporting: The Myths and The Reality Why Retail Investors Lose Money In The Stock Market Are You Ready For The Learning Curve? Are You EMOTIONALLY Ready To Lose? Trading Drawdowns by Peter Brandt Winning Trades and Losing Trades by Peter Brandt Want to learn how to trade successfully while reducing the risk? Start Your Free Trial