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Important: the first part of this post describes the general concept of the Anchor strategy. In January 2019 the implementation has been changed and Leveraged Anchor was born. The Leveraged Anchor implementation is described in the second part of the post The strategy description has been provided by Chris Welsh. Welcome to Anchor Trades! I would like to personally welcome all our members, those who have come from SteadyOptions, Seeking Alpha, and those which have come from elsewhere. I would encourage everyone to read the Anchor Frequently Asked Questions and the Anchor Trade Strategy topics. Those two topics should provide answers to the majority of your questions, as well a detailed discussion on what the Anchor Strategy is all about. You can see the Anchor Trades performance here. So What is an Anchor Trade? To put it simply, an Anchor Trade should be one that forms the keystone of any investment portfolio -- that reliable corner that you know you can depend on, regardless of market conditions. The one that lets you sleep at night, knowing your money is at work, but not subject to large risks. An Anchor trade's goal is to prevent loss of capital while still generating a positive net return in all market conditions. This strategy began with the premise that it must be possible to virtually fully hedge against market losses, without sacrificing all upside potential. Anchor trades are concerned for full year, full portfolio, protection, regardless of market conditions. Many investors try to insure against losses after those losses have already been incurred, or as they are occurring in real time – this is a mistake. It’s easy to be an investor during a prolong bull market, but what happens when a severe, or even mild, market correction occurs? At that point many investors find themselves trapped in falling positions, have stop losses kicking in, and are at a loss as what to do – other than to watch their principle dissipate. In the modern era of flash crashes, swift market volatility changes, and world risk it simply makes no sense to be invested in anything without portfolio protection. It is impossible to routinely predict the next negative major market event, therefore 365 days of protection is a necessity. I have given up trying to predict the day to day movements of the market -- therefore I Anchor my portfolio with this strategy (which can easily then be paired with other strategies). In the current market environment, such precautions are particularly warranted. It is my opinion that much of the recent market gains have been artificially propped up by low interest rates, the Federal Reserve, and the lack of alternative investment choices which can provide income to investors. At some point in the future the market is due, at the very least, for a correction, if not a significant down turn. With increasing turmoil in Syria, North Korea, and elsewhere in the Middle East, who knows what could tip the markets. Will this occur within two weeks, six months, one year, or even longer is something I've given up trying to predict. Rather I seek to protect against such events – whenever they may occur. Some strategies try to partially hedge against market risk through long short strategies, through the straight purchase of puts (typically out of the money at a substantial cost to the portfolio), through default swaps, or through numerous other instruments. However, each of these strategies only offers partial portfolio protection which either comes at a cost or which just assumes a set loss in the portfolio (such as ten or fifteen percent) is acceptable. I refuse to accept that philosophy and have developed a strategy around annual portfolio protection. Performance targets The impact of not experiencing losses in down market years, while only slightly lagging (if lagging at all) in positive and neutral years, is astronomical over any extended period of time. Utilizing the Anchor strategy over a number of years, particularly if any of those years are bear markets, should lead to the strategy significantly outperforming the markets as a whole, as back-testing has demonstrated. Even in prolonged bull markets, the returns should still be positive and lag negligibly behind. The peace of mind which comes with being fully hedged more than compensates for the potential of slightly underperforming the market as a whole in prolonged bull scenarios. Special thanks to Reel Ken, Kim Klaiman, and others who helped me evolve this strategy to its current form through their articles and discussions. Anchor Trade objective The Anchor strategy's s primary objective is to have positive returns in all market conditions on an annual basis. Anchor Trades will be divided into two separate forums: 1. The Anchor Trades forum will post my actual trades from my individual account, including weekly rolls, and any adjustments I make, as well as the price I received when filled. It will also include a thread for "model" trades that will be launched monthly. Model trades will be for those members who join after the initial actual trades are established, so any member can set up their own Anchor Portfolio. This way any member, regardless of when they join, will have a thread to follow applicable from their initial membership date. If you want to get notifications about the trades, you should follow this forum (by clicking "Follow this forum" button). If you follow this forum, you will receive an email when a new topic (trade) is posted. 2. The Anchor Trades Discussions forum will discuss each trade that has been made, detail the calculations behind the decision, and provide a Q&A forum for members to ask about any one trade. The thread will also have columns about the theory behind the Anchor strategy, implementation discussions, and be open to members to ask general questions. The Anchor objective is to produce equity like returns over a full market cycle, with reduced volatility and bear market drawdowns. If you have any questions about the threads, where information can be found, or just general questions, please feel free to send a message to either Kim or myself. I look forward to helping all member learn about this strategy and hopefully implement it themselves. January 2019 update - Leveraged Anchor In January 2019 we started tracking the leverage version of the Anchor for performance purposes. The leveraged version has been extensively backtested to fine tune the system for optimal results. Here are the highlights of the new implementation: We now use deep in the money calls, as opposed to long stock positions, and we are able to gain leverage without having to utilize margin interest. Given the rising interest rate environment we are in, and the high cost of margin interest rates generally, this can lead to significant savings; When we enter the trade, we look for a long call that has a delta of around 90. As the market falls, delta will shrink. For instance, if SPY were to decline ten percent, our long calls would have declined by less than nine percent. The closer we get to our long strike, the slower this decline; In the event of very large crashes, we can actually make money. See How Anchor Survived The 2020 Crash. Losses are capped. In the below example, the maximum loss is 9.5%. This can increase if we keep rolling the short puts throughout the downturn, but in any one “crash,” losses are limited to the ten percentage point mark (in Traditional Anchor this 9.5% max loss in one period is better, coming in at 8.5%). If we apply a momentum filter as well, then the risk of continuingly losing on the short puts declines; Please read The Downside Of Anchor for more details. In larger bull markets, the Leveraged Anchor outperforms both Traditional Anchor and simply being long stock as there is actual leverage being used. Some of this will depend on just how fast the market is rising and how often the long hedge is rolled, but in large bull markets, it should still regularly outperform. In fact, in any one period where the market grows more than 3.5% to 4.0%, the Leveraged Anchor will outperform simply being long SPY. The Leveraged version of Anchor will always outperform Traditional Anchor in any up markets. One question that must be addressed is just how much leverage to use? Luckily this is very easy to model on a thirty day period, with SPY at 250: Above is a table showing the performance of SPY, then using 25% leverage, 50%, and 75% leverage after certain market moves over a thirty day period. After reviewing the above, and similar tables over longer periods of time, we made a decision that utilizing 50% leverage was optimal. You of course can adjust, taking on more leverage, or less, as you see fit. Note the above table does not include any gains from BIL dividends. That should add around 10 to 20 basis points more performance per month on the leveraged versions. Overall, we should expect the leveraged to slightly outperform the market in strong bull markets, significantly outperform in strong bear markets, and slightly underperform in sideways or slightly up/down markets (+-10%). You can read more about the strategy here. Since inception, the leveraged Anchor is up 134.7%, compared to S&P 500 return of 90.3% (as of 12/31/2023). We also recommend reading How Anchor Survived the 2020 Crash. On March 19 2020, SPY at 234 (down 30%), Anchor UP $5k (~3%). Click here for a full analysis of 2022 performance.

https://www.youtube.com/watch?v=Ghl_GfNs99c https://www.youtube.com/watch?v=A5Tm_GBJauk The Black Swan Hedge trade structure, as described in the two videos above, is a 3:5 put ratio backspread designed to be a sustainable self-financing hedge. The trade is run as an ongoing campaign (legged in when certain market criteria have been met), resulting in a net 5 long puts per tranche at no net cost (or even a net credit). Over time, multiple long puts can be accumulated this way, increasing the hedging power. Has anyone considered whether this is a viable pairing strategy with Anchor Trades? The Black Swan Hedge structure seems like a plausible alternative hedging component, considering that the 5% OTM or ATM put hedge is the biggest cost of the Anchor Trade strategy and that financing the hedge with diagonal is its biggest risk. Here's a forum discussion about this trade structure started by one of the video uploader: https://www.elitetrader.com/et/threads/the-beauty-of-options-portfolio-insurance-at-a-discount.346405/ btw how can I post this to the Anchor Trades Discussion?

IWM performed the worse, followed by EFA. This is in contrast to the prior year when SPY was not the best performing and "Regular" Anchor lagged Diversified. In any given year, if SPY is the best performing index, Regular Anchor will perform better than Diversified. Given that I'm pretty bad at picking which index will do best each year, I prefer the Diversified approach. All four indexes performed exactly as expected given the market conditions -- but that does not mean we're satisfied with the results obtained. IWM in particular had a "bad" year, which means we've spent quite some time digging into the results. For several years now, I've said the worst possible outcome for Anchor is a small drawdown (0%-7.5% or so) right after opening the position, then trading in a sawtooth pattern on the year, followed by finishing almost exactly 5% down from the opening of the positions. IWM Chart: We rolled (and or many new members entered) IWM in March, when IWM was in the 225-230 range. Immediately thereafter it dropped to the 210-215 range and stayed there almost all year. This has the effect of us rolling the shorts on the diagonals for essentially zero credits almost all year, which means the hedge does not get paid for. If the hedge costs 8% and we start the hedge at 5% out of the money, there's a theoretical loss of 13% (or even a bit more) depending on if there were small losses here and there on the diagonal, if we paid a bit more for the hedge, on volatility, and a few other factors. If the drop in December had been bigger (15%-20%), our hedge would have kicked into full gear, as it was, delta didn't get above 70. In other words, we got, virtually "perfectly," the worst case scenario on IWM. So the question becomes, "how do we improve?" For the last six months, I've been trading the same strategy on BTC, which has similar volatilities to IWM (at least in the last year), and we ran into the exact same problem with the diagonal paying for things. We learned, through live experience and testing, that on higher volatility instruments you need to roll the diagonal down much more frequently then you roll down to increase your calls (as happens in crashes). This is not a "magic bullet" if the market drops 3%-4% and stays there for several months, when do we roll down? But it should help. Other members have suggested implementing an iron condor/vertical spread trade on top of the long positions, particularly in the higher volatility instruments such as IWM. I have extensively tested this, it is a losing strategy over time, particularly if you do at a 1:1 ratio (e.g. if you are long 2 calls doing 2 vertical spreads). This is because sooner or later you WILL miss out on a big move up or down -- which is where Anchor really shines. Sure, particularly on IWM, a wide vertical spread or iron condor will win 90% of the time. But making $1.00 90% of the time and missing out on $50 the other 10% of the time doesn't make much sense long term. If you have good "feelings" about the market (I'll reserve my opinions on that), and you think its going to stay flat, trend down, or whatever, and believe your momentum/fundamental analysis, you certainly can implement the strategy -- but if you do, I wouldn't go above a 2:1 ratio -- of course it's each investor's own call. In other announcements, Soteria Fund officially started trading in October. We had to rename Anchor to Soteria, as opposed to getting into a trademark fight (me as a lawyer and another IP lawyer thought we could win the lawsuit, but it seems dumb to get into a lawsuit over a name for the launch of a fund - investors tend to run from that type of thing). The Soteria Fund is open to US and non-US investors, but such investors do have to be qualified clients (net worth over $2.1m). If you have questions about the fund, would like to join, or know someone who might, it is open and I'm happy to discuss it. Other than the above, we're quite happy with Anchor and look forward to another great year. Feel free to post questions, comments, criticisms, or concerns. *Yes, I'm still working on updating the FAQ. Related articles: Anchor Trades Portfolio Launched Defining The Anchor Strategy Leveraged Anchor Is Boosting Performance Leveraged Anchor Update Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis A More Diversified Anchor Strategy Anchor Analysis and Options Diversified Leveraged Anchor Performance The Downside Of Anchor Leveraged Anchor 2020 Year In Review

This is how the Anchor portfolio looked like on Feb.6 2020, two weeks before the start of the decline: SPY was at 334, total portfolio value around $143k. This is how the P/L chart looked like: With 8 SPY contracts, this translates to x1.85 leverage. This setup obviously should perform very well on the upside (the portfolio should easily outperform SPY on any upside move), but the downside doesn't look that great on this P/L chart. Lets see how things developed. Feb.28 2020, SPY at 290 (down 13%), Anchor down $15k (~10%): With SPY down 13%, the Anchor portfolio was down only 10%. This is normal and expected. The strategy is not designed to provide a total protection, especially in smaller declines. It is worth mentioning that the puts are typically 5% OTM when opened. It’s entirely possible for Anchor to be up 7%, then the market drops, and we end up down 12% peak to trough (or even a bit more). The Downside of Anchor discusses it in more details. Two weeks later, March 12, SPY at 251 (down 25%), Anchor down only $4k (~3%): Now you can see how the protection kicks in after a bigger decline. Fast forward to March 19 2020, SPY at 234 (down 30%), Anchor UP $5k (~3%): Now, this is pretty amazing. How this was possible? Few factors contributed to this major outperformance: We used deep ITM calls instead of the stock. As the underlying declines, the delta of the calls decreases and they lose less value. In this case SPY declined $100, while the calls declined only $68. We have more long puts than short puts, so the gains of the long puts far outpace the losses of the short puts. During market crashes, IV jumps to the roof (in this case, VIX jumped from 16 to 80+). This caused the long puts to increase in value much more than expected. In addition, we got much more premium from the short puts when rolling. The bottom line: in the last 30 months, the strategy produced 36.6% CAGR, significantly outperforming the S&P 500, but at the same time provided a full protection during the market crash. To me, this is as close as it gets to the holly grail of investing. Related articles Leveraged Anchor 2020 Year In Review Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update Leveraged Anchor Implementation A More Diversified Anchor Strategy Anchor Maximum Drawdown Analysis Why Doesn't Anchor Roll The Long Calls? The Downside of Anchor

A “normal” Anchor portfolio uses about 90% of its available cash to purchase long equities, most commonly ETFs. The other 10% is used to purchase the hedge. This means, even if the strategy performs “perfectly” by paying off the hedge, in the best case scenario, it will still lag the market by at least ten percent – and we all know perfect performance is unlikely. In other words, if the market goes up 20%, Anchor will, at absolute most, go up 18% -- prior to accounting for the cost of the hedge. By replacing the ETFs with a combination of ETFs and long dated deep in the money call options we can increase performance without greatly impacting risk. Let’s take an example $100,000.00 portfolio and assume SPY is currently trading at 266.92, the end of value on the day this post was written. Using the June 21, 2019 options, a “normal” Anchor portfolio could look like: Long 6 June 21, 2019 265 Puts $16/contract ($9,600) Short 2 May 25, 2018 268.5 Put $3.34/contract $668 Long 340 shares of SPY[1] $266.92/share ($90,752.80) Left over cash $315.20 [1] SPY is being used for simplicity sake, one could just as easily use the standard blend of SDY, VIG, and RSP But what if we instead bought calls and constructed the portfolio as follows: Long 8 June 21, 2019 265 Puts $16/contract ($12,800) Short 3 May 25, 2018 286.5 Puts $3.34/contract $1,002 Long 4 June 21 2019 150 Calls $117.56/contract ($47,024) Long 100 shares of SPY $266.92/share ($26,692) Left over cash $14,486 In this case we’re essentially long an extra 47% when compared to the “normal” Anchor portfolio and have left over cash we can invest in a low paying instrument (such as BIL), yielding approximately 1.5%. The four long calls each control 100 shares, which totals 500 shares under control as opposed to only 340 shares in the “normal” Anchor model. Looking at the possible scenarios in June 2019: Now the above analysis assumes that the hedge is exactly fully paid for and that all other variables have remained the same. This assumption means we would have collected exactly $0.80.week each week – and we know that is impossible – but it still a useful analysis. The reason that the further down SPY drops, the more money “normal” Anchor makes is with our 4 long puts we are slightly over-hedged, which profits on the down side. The Leveraged portfolio is perfectly hedged. Looking at the above it is very easy to see that Anchor and the Leveraged version perform the same in down conditions but the leveraged version vastly outperforms in up markets. This only makes sense as it is a leveraged product that is still fully hedged on the downside. This doesn’t tell the whole story though – for two reasons. The first is beneficial to the leveraged version. The above model assumes a delta of one as the price of SPY drops. However, that is never the case. As the price of SPY gets closer and closer to the 150 strike, delta will go down (and volatility likely will be increasing during this time as well). As delta goes down, the long calls won’t lose dollar for dollar, as a pure long position would. This means that the above values are actually understated. The Leveraged version should outperform in down markets as well. It outperforms in flat markets due to the interest gained on the extra $14,486 cash. It would seem then that the Leveraged version is vastly superior and should always be used – and if the paying off the hedged worked perfectly, then that would be the case. But as any Anchor trader knows, paying off the hedge is always the most difficult task – particularly in large bull markets which require the hedge to be rolled several times. Because the leveraged version has more short puts, when the market goes down, those short positions are going to lose at a higher clip. Similarly, when we have to roll the long hedge, we will lose more rolling. In other words the risk increases. Is the risk worth the potential gains? That depends on both market conditions and each individual investor’s preferences. The Leveraged version is also not tax efficient. With a normal Anchor account, you hold the long ETF positions until you need to liquidate - which could be decades. The only real tax impact is from the option positions, which could easily be negative on a year the markets are up. On the other hand, the leveraged version will realize gains every year as the long calls are bought and sold - leading to tax inefficiencies. Depending on your tax bracket and situation, this could have an impact on choosing one or the other. Starting in June, we're going to start tracking a leveraged version of the Anchor portfolio for subscribers, which can also be professionally managed through Lorintine Capital. Feel free to email Chris at cwelsh@lorintine.com with any questions. Christopher Welsh is a licensed investment advisor in the State of Texas and is the president of an investment firm, Lorintine Capital, LP which is a general partner of three separate private funds. He is also an attorney practicing in Dallas, Texas. Chris has been practicing since 2006 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. He offers investment advice to his clients, both in the law practice and outside of it. Chris has a Bachelor of Science in Economics, a Bachelor of Science in Computer Science from Texas A&M University, and a law degree from Southern Methodist University. Chris manages the Anchor Trades portfolio, the Steady Options Fund, and oversees Lorintine Capital's distressed real estate debt fund.

Historically diversified portfolios, over time, outperform concentrated portfolios with less risk and volatility. The simple reason for such results is that different asset classes perform differently year to year: Regardless of which asset you picked from the above table, in some years it would perform well comparatively and others not as well. This volatility can be (partially) eliminated through diversification. Simply blending large caps, small caps, and international would significantly increase a portfolio performance over time. Numerous studies (and a simple google search) can confirm this fact. We took this basic investment premise in 2020 and applied it to Leveraged Anchor. Unfortunately, we know that Leveraged Anchor does not “work” well on certain instruments (such as GLD or SLV) or those with already extremely low volatility, such as government bond indexes. Thus, we elected to use a blend of the S&P 500 (SPY), the Russell 2000 (IWM/Small Caps), Large Cap International (EFA), and Technology (QQQ). An argument could be made against QQQ as there is some overlap between it and SPY and that both are concentrated in US Large Caps. However, it performs well with Anchor, and demonstrated low correlation with SPY at the time it was selected. If it and SPY become highly correlated again, we may look to substitute a high-volume REIT ETF after testing. One year after beginning trading, the results speak for themselves. Here are the monthly returns for the Diversified Leveraged Anchor strategy: All of the starting values were slightly different, as each was based upon whole contracts, with a target investment of each sector between $130,000 - $140,000. Note these results do not include commissions. Any one of the four sectors performance was impressive, but the blend of the four was even better. An annual return of 57.70%, with a Sharpe ratio of 2.81, are returns no one should ever complain of – unless it was worse than just holding the underlying instruments, on a risk adjusted basis. Using published data from Morningstar, and starting with identical balances (so fractional shares were permitted), the returns of the underling ETFs over the same period were: As can be seen, if an investor had simply put their holdings in the same ETFs, they would have only returned 43.70% -- without any hedging in place. For a more succinct break down, over the last twelve months: Leveraged Anchor on SPY returned 44.19% while SPY itself only returned 38.65% (5.54% outperformance, while being hedged) Leveraged Anchor on EFA returned 40.97%, while EFA returned 37.33% (3.64% outperformance, while being hedged) Leveraged Anchor on QQQ returned 55.00%, while QQQ returned 27.79% (27.21% outperformance, while being hedged) Leveraged Anchor on IWM returned 90.86%, while IWM returned 71.62% (19.24% outperformance, while being hedged) Diversified Leveraged Anchor returned 57.70%, while a diversified ETF returned 43.70% (14.0% outperformance, while being hedged) In other words, Leveraged Anchor worked on all four instruments, provided excess returns in a bull market, while still protecting against large drawdowns. Not surprisingly, the higher volatility instruments had a larger spread over the underlying instrument. This is primarily due to the higher credits received. We should expect the opposite to occur in extended drawdowns – which is another reason to continue to diversify. Because of the strategy’s continued success, in the very near future we will be launching this as a fund investment, with the goal of raising substantial capital. All Steady Options members will be given the opportunity to invest in it first, as well as to help grow the fund via a solicitor arrangement if they so desire. If anyone has any questions regarding the Diversified Leveraged Anchor strategy, please post your questions or email me at cwelsh@lorintinecapital.com. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog. Related articles Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update Leveraged Anchor Implementation A More Diversified Anchor Strategy Leveraged Anchor 2020 Year In Review Anchor Maximum Drawdown Analysis Why Doesn't Anchor Roll The Long Calls?

One of the “best” things for Leveraged Anchor occurred in February and March. Up to this point, Leveraged Anchor’s success in a down market was largely theoretical. We knew the math was right, and that the strategy had been back tested in down markets, but it had not been subject to a “real” market correction when invested. On February 6, 2020, Leveraged Anchor rolled its short position and long hedge when SPY was at 333.72. Shortly after this the markets started to experience some volatility. By the end of February, SPY had dropped 12.6%, the tracking account was assigned on the short position, and the value of the Leveraged Anchor Portfolio had dropped almost 9.5% drop from its peak and dropped 5.7% on the month. With the market dropping 12.6% from the February 6 point and 9.3% on the month, Leveraged Anchor was outperforming, but the 9.5% drop (from the peak not from the point at which it was hedged) was a bit worrisome and some concerns developed on what would happen if the market kept dropping. Well keep dropping it did. Over the next few weeks, the market continued to plunge. This quick plunge led the strategy to being assigned on the short puts again on March 23, 2020. At this point the market had dropped all the way to 222.33 – losing over 33% of its value. Yet over this same period, Leveraged Anchor rose back up some. In other words, from February 6, 2020, SPY dropped 33.4%. Over this same time Leveraged Anchor only dropped 1.1%. Leveraged Anchor was performing even better than expected. The twin benefit of having a large volatility spike increase the value of the puts and the advantage of using a 90 delta call proved more than efficient in a large down market. A 90 delta call loses $0.90 for every $1 SPY declines. Further, as SPY declines, the delta declines as well. In practical terms the more dramatic the market drop, the less dramatic drop in the option. At this point we realized that, at some point, the market would rebound – and Anchor would not. (As the calls go up in value, the puts go down in value, we would have been lucky to “stay even” on a rebound). However, our puts were so much in the money we could roll them down, take profit and free up cash, and keep the delta of the put above 90. In other words, if the markets continued to go down, we would not suffer by being under hedged. In April, when it looked like the markets were returning (SPY was already back up to 280), that is exactly what we did. Then with that free cash, we increased our position size, which allowed the strategy to participate in some of the up market. It of course will not be dollar for dollar, but if Anchor goes down 1% when the market goes down 33%, and then Anchor goes up 25% when the market goes up 50% (after a 33% market decline, a 50% rebound is needed to get back to break even), Anchor ends up over 20% ahead. Of interesting note, had we rolled the puts down and increased our sizing when SPY was at 222, as opposed to 280, instead of going from 7 to 8 call contracts, we would have gone from 7 to 10, and Anchor would have finished the year another up an additional 10%. I know of at least one member who successfully bottom ticked the market and extracted over 10% more by doing exactly that. Knowing that that the strategy could have done better than it did is simply amazing. With the success of the strategy, we began to think of how to improve it further, and an obvious solution presented itself – diversification. Over the long term (and Leveraged Anchor is a long-term strategy), being diversified in different stock classes virtually always outperforms AND reduces volatility at the same time. This led to the birth of Diversified Leveraged Anchor, also in April 2020. The timing of the launch could not have been better. Over the past several years, the S&P 500 had been the top, or one of the top, performing asset classes. However, over the next months, it would slip behind others. Members are invited to read the Leveraged Anchor Implementation to see what the expectations were when the Anchor was launched. Above is a table showing the performance of SPY, then using 25% leverage, 50%, and 75% leverage after certain market moves over a thirty day period. After reviewing the above, and similar tables over longer periods of time, we made a decision that utilizing 50% leverage was optimal. As you can see, the strategy performed better than expected, in both bull and bear markets. If the market declines 40% or more, the portfolio would actually be in a positive territory. On the year, Leveraged Anchor (SPY only), was up 31.7%, while the total return of the S&P 500 was 18.4%. This is an incredible result. However, once applying diversification, the results improved even further. The below results are from the time the diversified strategy launched (April), not from the start of the year. The dates listed are the actual days the trade occurred: The power of diversification can quickly be seen. If the strategy remained only in SPY, it would have returned 35.93%, under performing each of the other three indexes. By blending performance increased almost fifteen points to 50.74%. We would expect such results in every year that the S&P 500 is not the best performing index. In the coming days, we will be: Re-balancing across the indexes if needed; and Exploring rolling the long call strikes up and out to increase cash and grow the position. Rebalancing is a simple matter and must periodically be done to maintain the balance between each portion of the strategy. However, concern must be given to potential tax consequences, changes in leverage, and, as fractional options are not available, what the possible rebalancing results look like. Similarly, rolling the long calls to increase the position size (leverage), must be weighed against tax concerns. It makes little sense to increase leverage by a few percentage points if there will be significant tax implications that can be avoid by waiting a few months. One of the questions we are often asked is "under what circumstances would you expect to lose money on the account?" We covered this in the The Downside Of Anchor article. Another question is "How do newcomers "catch up" so everyone is playin the same game?" The members forum has a dedicated topic with detailed instructions of how to start a new portfolio. While I know 2020 has been a tough, even tragic, year for many people, it certainly has not been for Anchor, and it is our hope that a growing portfolio using this strategy has at least somewhat helped. The strategy not only outperformed the markets, it also allowed our members to sleep well at night and not worry about market timing. As always, if there are questions or suggestions, please do not hesitate to post them. Anchor has had an incredible decade of evolution to get to this point, and I we are always open to improving it in other ways if it can be done. Christopher Welsh is a licensed investment advisor in the State of Texas and is the president of an investment firm, Lorintine Capital, LP which is a general partner of three separate private funds. He is also an attorney practicing in Dallas, Texas. Chris has been practicing since 2006 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. He offers investment advice to his clients, both in the law practice and outside of it. Chris has a Bachelor of Science in Economics, a Bachelor of Science in Computer Science from Texas A&M University, and a law degree from Southern Methodist University. Chris manages the Anchor Trades portfolio and oversees Lorintine Capital's Related articles: Anchor Trades Portfolio Launched Defining The Anchor Strategy Leveraged Anchor Is Boosting Performance Leveraged Anchor Update Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis A More Diversified Anchor Strategy Anchor Analysis and Options Diversified Leveraged Anchor Performance The Downside Of Anchor

Prior to answering that question though, we must revisit what exactly Anchor is, and what it is not. The Anchor Strategy is a hedging strategy that hedges on a year to year basis. Many investors have been puzzled as to why Anchor has not been going up with the market over the past week (as SPY has gone from around 220 to 260, Anchor accounts have either remained flat or even gone down slightly). That is to be expected from how the strategy is designed. No investor should see substantial gains in their portfolio until SPY starts moving above where the trade was opened. For example, if you opened the Anchor Strategy when SPY was at 300, using the 285 puts, and the market crashes ten percent or more, you should expect your account to stay approximately the same as when the account was opened. We saw this occur when the markets dropped 30% or more and the Anchor accounts actually went up slightly in value. However, as the markets start going back up toward the 300 level when your account was opened, Anchor will not go up in value. That’s simply because the puts are going to be losing value at the same rate (if not faster) than the long positions gain. In other words, until SPY gets back above 300, you should not expect your account to increase in value. This frustrates many investors. Everyone loves the 30% outperformance on the way down, but hates the 20% under performance on the way back up. But remember, the strategy is a year to year hedging strategy. It was not designed to profit after a large market decline, but rather was designed to protect capital in down markets and when new highs are reached (new highs based on the point of your initial year hedging), then you should expect gains. Quite a few investors though are not happy with this result. They want the protection in down markets, but also to gain as the markets go back up. The last week in the market, as SPY has gone from 222 to 260, has been a great example of exactly how this occurs. Take the model portfolio – on March 23, 2020 it was worth $141,684. Over the next seven days, an incredible bull market occurred, as SPY rose 17%. After the roll of the short puts on March 30, the model portfolio has dropped in value to $124,847, a drop of 11.88% in a week. This places Anchor down 8.3% on the year (down 5.4% in the first quarter) and the market down 18.75% (320 to 260). Given that Anchor’s hedge doesn’t even kick in until a 5% drop in the market, this result is exactly in line with what is expected. However, no investor in Anchor is happy at the 11.88% loss in a week as investors mistakenly believe Anchor provides protection against that. It does not. Anchor is a year to year strategy not a week to week. The strategy is beating the markets by 7% and protecting against large declines. If the markets reverse back down, the strategy will greatly excel again. So how is an investor to profit as markets rebound? The only way to do this is to adjust/reset the Anchor Strategy. However, as noted numerous times, “resetting” or opening a new Anchor account after a large decline is quite expensive and sets investors up for underperformance. So what are investors to do? Below is a brief analysis of the four different options available: Option 1 – Do Nothing I am not an advocate of changing strategy mid-flight. The Anchor Strategy is a capital preservation strategy and it is doing that spectacularly. If an investor were to take either of the below options, and the market declines further, they would be in a significantly worse position than if they did nothing, thereby losing some capital. If you reset the position, to a lower hedge (a) the cost of the hedge is much higher, which will act as a drag on the portfolio as paying for the hedge is more difficult and (b) if the market drops further, the account will drop more than if no changes had been made. The reason for this is two-fold. First, we open the hedge 5% out of the money. This means if the market drops 5%, the account will essentially have little to no protection. The investor will just “lose” that five percent again (having lost that five percent on the initial decline). Secondly, the SPY long call position currently has a delta of around 0.7. This means if the market drops $1, the investor’s account will only drop $0.70. If the position is reset to a call of close to one, then if the market drops $1, the investor’s account will also drop $1. If the investor is in a capital preservation mode, and does not want to increase risk, the best option is to simply continue to manage the strategy as designed. Option 2 – Reset the Position Many investors though want (or expect) gains to come from investments when the market is going up, even if they have greatly outperformed over the past 30-60 days. The thought process normally goes like this: A. I beat the market by 25% last month; B. I will be very frustrated if next month the market goes up 20% and I go up 0%; C. I am ok if the market goes down 10% and my account goes down 10% because I am still outperforming the market on the year by 25%; D. I don’t need my investments right now for expenses; and E. I would rather take on additional risk to try to grow my account as the market goes back up (if it goes back up). If this fits your profile, closing out the existing Anchor position and “resetting” it to a new position would not be a bad decision. (I am strongly leaning toward this in my personal account. But I do not need the money to live on, I have decades left before retirement, and I would rather take the chance to gain even more and take on the risk of losing 10% -- but that is not the case for everyone – each investor needs to take their own situation into account). How would this be accomplished? Simple…liquidate the current Anchor Strategy and simply re-enter. As noted above, the current model portfolio is valued at a few dollars under $125,000. If an investor were to launch a new Levered Anchor Position on $125,000, it would look like: Buy to open 8 contracts June 18, 2021 170 Calls for $94.85 (about 66% leverage, 7 contracts would give 45% leverage, 9 contracts 87% leverage) – Total cost: $75,880 Sell to open 8 contracts March 19, 2021 Puts for $25.81 (Use the June 2021 calls to ensure long term capital gains while using the March 2021 puts as its closest to 365 days and if the markets move up quickly and the hedge has to be adjusted, it is cheaper and investors have the ability to roll up and out as well) – Total cost: $20,648; Buy to open 4 contracts of the March 19, 2021 260 puts for $31.04 (to hedge the short puts) – Total cost: $12,416; Sell to open 4 contracts of the April 22, 2020 262 puts for $14.36 – Total credit: $5,744; Buy 230 shares of BIL for $91.62 – Total cost: $21,072.60; and Hold $727.40 in cash. If an investor were to use 9 long calls, to increase the leverage, then that investor should also increase the short hedge and short contracts to 5. All investors should remember, over time, Anchor tries to target needing a short credit of $0.80/contract/week when initializing the position. The above requires double that to pay for the hedge. This means the hedge is basically twice as expensive to pay for. As long as volatility remains high, that’s easily doable. However, as markets rebound, short put credits greatly decline in value. I would not expect to be able to pay for the above hedge over the next year, particularly if it has to be rolled up as markets go up. However, while this means investors will lag the performance of the market as the markets go up, their total performance over the year, including the market downturn, should be better. E.g. Anchor is currently outperforming by 7%. If it lags the market by 5% on the uptick, the adjustment still leads to market outperformance, and investors do not have to watch their account stay the same (or go down) as the markets rise. Option 3 - Sell Puts that are Deeper in the Money Traditionally Anchor sells puts that are around a .55 delta (1-2 strikes in the money), 24 days out, and rolls such puts once the strategy has captured most of the time value of the short puts. Investors could profit some more by selling puts that are further in the money. For instance, instead of selling the 262 puts, an investor may sell the 280 put. If the markets rise swiftly, having sold further in the money will be more profitable than aggressively rolling the short puts. The risks to such strategy include: With a higher delta, if the market declines, the short puts will decline in value faster than a position closer to at the money; Selling puts further in the money requires higher margin and cash requirements, particularly in IRAs; and If the markets are slowly increasing, it may be more profitable to roll short puts at the money. Option 4 (Most Risky) – Temporarily go Long The biggest drag on option II above is the cost of the hedge. Several investors have expressed a desire to take on more risk and not hedge. The logic of this strategy goes: A. I beat the market by 25% last month; B. I will be very frustrated if next month the market goes up 20% and I go up 0%, or worse; C. I am ok if the market goes down 10% and my account goes down 10% because I am still outperforming the market on the year by 25%; D. I am ok if the market goes down 25% and my account goes down 25% because I’m still beating the market on the year; E. I don’t need my investments right now for expenses; and F. I would rather take on additional risk to try to grow my account as the market goes back up (if it goes back up). How would this decision be accomplished? Similar to above, liquidate the current Anchor Strategy and simply re-enter the long positions without purchasing the hedge. As noted above, the current model portfolio is valued at a few dollars under $125,000. If an investor were to launch a new Levered Anchor Position on $125,000, it would look like: Buy to open 8 contracts June 18, 2021 170 Calls for $94.85 (about 66% leverage, 7 contracts would give 45% leverage, 9 contracts 87% leverage) – Total cost: $75,880 Buy 530 shares of BIL for $91.62 – Total cost: $48,558.60; and Hold $561.40 in cash. There is substantial risk to the above. If the markets drop from 260 to 220, investors should expect their long calls to decline to $60.50 (approximately), a drop in their portfolio of over 21% -- more than the market drops. If this strategy were to be implemented, I would highly suggest taking on less leverage. By reducing the leverage to 45%, the 21% loss would be reduced to 19%. By reducing to six contracts, the loss would be reduced to 16%. Another risk to keep in mind is that in the event of a large market drop (below SPY 170), the investor’s account could be looking at 50% total losses. To combat such risks, an investor could temporarily eliminate leverage and buy SPY shares. Or the investor could implement a partial hedge. Even a 50% hedge would help alleviate some of the risk. Further, when volatility drops, and the long hedge becomes more affordable, long puts should be purchased. If an investor was in the Anchor Strategy to preserve capital, switching to a long only position to try to “gain” when the markets gains is not a smart decision. Another common question is “when should I make the decision to re-structure Anchor? The proper answer is “at the bottom tick of the market.” Of course, if an investor knows when the bottom is going to hit, there are much better ways to take advantage of the situation. The next best time to enter is at the same time as an investor would enter the Anchor Strategy normally – namely after one or more up days in a row, when volatility has declined. In the model account, we are taking the following steps: Stay particularly aggressive in rolling the short puts up as the market moves up; Not change the positions until more economic news comes out – there is significant uncertainty on unemployment numbers, production, the length of time the economy will be shut down, how lenders and financing will be impacted, etc., which means sacrificing downside protection right now doesn’t make much sense; If there’s another major downtick (back down to below SPY 230) then look to perhaps implement item II above, or a blend of II and III. Remember the purpose of Anchor – capital preservation and positive returns as the market goes above each investor’s entry point. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog. Related articles Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis Why Doesn't Anchor Roll The Long Calls?

Our confidence in the strategy continues to grow as well; enough that we are exploring how to more broadly market it next year, with a goal of getting to $100m or more under management on the strategy. Unfortunately, it has also led to some misunderstanding of what the strategy is capable of. In the past few weeks, I have received statements such as: "I love being in a strategy that can’t go down.” “I can’t believe I can beat the market without risk.” “I like being able to sleep knowing my maximum drawdown is 5% or less.” “I’m worried that I might lose all of my money in Anchor, can you explain it better?” None of these statements are true. Leveraged Anchor absolutely can, and at times will, go down. There is certainly risk, and the maximum drawdown potential is over five percent. At the same time, the only way to lose all your money is if the options markets completely collapse and cease to function. The purpose of this article is to provide some clarity on these issues. First, the strategy can, and will, go down. If an individual invests $100,000 and purchase protection five percent out of the money, then the expected scenario in a market crash is the account drops to at least $95,000. Actual performance may be slightly better or slightly worse. If volatility goes up and the delta of the long calls declines, the account might not go down that much. On the other hand, if volatility does not drop very much and the decline is not that sharp, the position may lose on the short puts and the decline may be worse (maybe in the 7%-9% range, depending on the changes in volatility). In either case, a drawdown can certainly occur. It is a virtual certainty at some point that the accounts go down in value. Second, an assumption that Anchor cannot go down ignores the fact that the strategy does not roll the hedge every day. Take the following situation: Open an account for $100,000 and hedge at $95,000; The account grows to $108,000 (right about the time to roll); and Just before rolling the long hedge, the market drops 50%. The drop on the investor’s account will be back down to around the $95,000 level, plus or minus a couple of percentage points based on the performance of the short puts. While this is a five percent loss from the opening balance it is twelve percent loss from the account high. Investors need to remember the strategy protects from the opening level (or rolled level)not from the current high. This leads to the question of why the hedge is not rolled more frequently, even up to every time the market goes up. The simplest explanation is cost. The largest drag on Anchor is the cost of the hedge. Every time the hedge is rolled, the strategy incurs a cost. At some point it becomes impossible to pay for the hedge in a year. However, given that the strategy rolls as the market goes up, and the position is levered, the strategy can afford to incur some increased costs. There has been significant testing into the “optimal” time to roll the hedge. What was learned is “optimal” is fluid – based on volatility, time left in the prior hedge, and a few other factors. This led to the creation of a “range” on which to roll. It is known if we roll every five percent market gain the costs can overwhelm performance. If rolls only occur after 12.5% or more gains, then money is left on the table on drawdowns. Thus, the rule of thumb of “7.5% to 10%” was created. If you are an investor who is more conservative, comfortable with limiting upside some, then more frequent rolls of the hedge are fine. If you are a longer term, more aggressive, growth investor, then less frequent rolls are just as acceptable. Another factor many do not consider is the impact of using leverage. The amount of leverage does matter and impacts risk of the portfolio. Leveraged Anchor performs the worst in markets that are flat for long periods of time or that decline slowly in small amounts. If the market slowly bleeds (1%-3%) over a three-week period, the strategy takes small losses on the short puts, without actually gaining on the long puts. One of the worst possible outcomes for the strategy would be if the market loses 1% every quarter for four quarters in a row in a very uniform manner. Under that scenario, the strategy has lost money on selling the puts short (e.g., not paid for the hedge), has lost money on the calls (because the 5% hedge never kicks in – the market is only down 4%), and even the puts covering the shorts will not have increased in value. It is entirely possible for the market to be down 4% and the strategy down 10%, or more. The use of leverage worsens this problem, as the cost of hedging has gone up, and if the hedge is not paid for, that increased cost has a larger impact. A portfolio with no hedging may have a maximum loss of 8%, while a portfolio with over 100% leveraged may double such losses in small declining markets. (Please note such numbers are for example only.) Leveraged Anchor accepts this risk as historically less than 15% of annual stock markets tend to meet the “flat” criteria. If the strategy outperforms in up markets and outperforms in large down markets, we feel having underperformance 15% of the time is acceptable. This is particularly true for the long-term investor. Of course, there is no guarantee that historic trends continue, and all Anchor investors should be aware of the markets in which the strategy may underperform expectations. No investor should think Leveraged Anchor is risk free, that drawdowns are not possible, or that the strategy will outperform in all market conditions. Such statements simply are not true. What investors should expect is superior performance due to leverage in bull markets and having catastrophic market protection. Given most market drawdowns are of the significant variety, this helps investors sleep. The strategy provides superior risk adjusted returns – not risk free. Christopher Welsh is a licensed investment advisor in the State of Texas and is the president of an investment firm, Lorintine Capital, LP which is a general partner of three separate private funds. He is also an attorney practicing in Dallas, Texas. Chris has been practicing since 2006 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. He offers investment advice to his clients, both in the law practice and outside of it. Chris has a Bachelor of Science in Economics, a Bachelor of Science in Computer Science from Texas A&M University, and a law degree from Southern Methodist University. Chris manages the Anchor Trades portfolio, the Steady Options Fund, and oversees Lorintine Capital's distressed real estate debt fund. Related articles: Anchor Trades Portfolio Launched Defining The Anchor Strategy Leveraged Anchor Is Boosting Performance Leveraged Anchor Update Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis A More Diversified Anchor Strategy Anchor Analysis and Options Diversified Leveraged Anchor Performance

One of the largest reasons for this is that different asset classes tend to outperform other classes in any given year: As well as Leveraged Anchor has performed over the past couple of years, a large part of that performance can be attributed to the S&P 500 simply performing well – a trend that may or may not continue. Given that the developers of the Leveraged Anchor strategy developed it in part on the premise of “we don’t know what the market is going to do over the next year,” diversification of the strategy only makes sense. In furtherance of this, the strategy was diversified into four different indexes: SPY – S&P 500; QQQ – Nasdaq; EFA – Large cap international excluding US and Canada; and IWM – Russell 2000 (small caps). While there is some overlap between the S&P 500 and the Nasdaq, the two indexes have had differing performances over the last decade: Given the popularity of the two indexes, we wanted to gain exposure to both. A driving factor in selecting the above instruments was volume of their option markets, as our strategy is almost entirely option driven. All four of the above are top 10 instruments in total daily option volume and number of open contracts. Liquidity should not be a major concern on any of the above except for the very largest of portfolios (and in which case there are ways to trade the indexes more directly than ETFs). Consideration was given to including real estate through a REIT or REIT ETF, but the only possible instrument identified that traded weekly options was IRY and it has fairly low option volume so was excluded. Consideration was also given to adding in commodities (such as GLD or SLV) or bonds (such as HYG) but such instruments did not perform well in testing of the Leveraged Anchor strategy – at all – in any market conditions, so such instruments were excluded. This does not mean such instruments do not have a place in a full portfolio – they absolutely do – but they just do not currently have a place in a Diversified Leveraged Anchor portfolio. Theory is one thing, but how has it worked in practice since going live? Too often in stock and option trading theory does not match reality. Fortunately, several months in, diversification has worked exactly as intended. The first EFA Leveraged Anchor position was opened on April 14, 2020. Through July 1, 2020, the underlying EFA stock position was up 8.91% and the Leveraged Anchor EFA position was up 7.28%. The first QQQ Leveraged Anchor position was opened on April 17, 2020. Through July 1, 2020, the underlying QQQ stock position was up 17.44% and the Leveraged Anchor QQQ position was up 21.64%. The first IWM Leveraged Anchor position was opened on April 28, 2020. Through July 1, 2020, the underlying IWM stock position was up 9.27% and the Leveraged Anchor IWM position was up 9.11%. Over the same general period, SPY stock was up 8.58% and the Leveraged Anchor SPY position was up 5.35%. In other words, an undiversified Leveraged Anchor position was up 5.35% while the Diversified Leveraged Anchor position was up 10.85% -- more than double the performance. Overall, each of the new Leveraged Anchor instruments has performed as expected, if not better (QQQ has done much better than expected). All three of IWM, EFA, and QQQ required the long hedge to be rolled in the first three months, which is normally a large cost item and operates as a drag on performance. And while such a drag can be seen on EFA and IWM, such drag was minimal and should balance out as the hedge is continually paid for over a full year period. In short, in the limited window of time we have diversified the Leveraged Anchor strategy, we are very pleased with the results and look to continue success over the coming months. Christopher Welsh is a licensed investment advisor in the State of Texas and is the president of an investment firm, Lorintine Capital, LP which is a general partner of three separate private funds. He is also an attorney practicing in Dallas, Texas. Chris has been practicing since 2006 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. He offers investment advice to his clients, both in the law practice and outside of it. Chris has a Bachelor of Science in Economics, a Bachelor of Science in Computer Science from Texas A&M University, and a law degree from Southern Methodist University. Chris manages the Anchor Trades portfolio, the Steady Options Fund, and oversees Lorintine Capital's distressed real estate debt fund. Related articles: Anchor Trades Portfolio Launched Defining The Anchor Strategy Leveraged Anchor Is Boosting Performance Leveraged Anchor Update Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis A More Diversified Anchor Strategy

The model portfolio also expended a bit of cash to reset the long call position, so the strategy could participate more if and when the market continues to rebound. Even with this good performance, we are always looking to improve overall performance. Improved performance can occur through a reduction in risk, better absolute performance over time, or a combination of the two. I’ve created three different portfolios for demonstrative purposes. Portfolio 1 is 100% long SPY. Portfolio 2 is 25% each of SPY, IWM (small caps), QQQ (technology), and EFA (international). Portfolio 3 roughly curve fit the best blend of them (thanks to portfolio visualizer): As can be seen, virtually any blend of diversified assets has outperformed simply holding one asset class over the last 20 years. If we curve fit, we can greatly increase performance – by almost 2% per year. Historically, going further back in time, this pattern holds even more true. A diversified blend of assets typically reduces risk and increases performance, over significant periods of time. Of course, you’ll be able to find a 1-5 year period (or maybe even longer), where a single asset class outperforms a diversified basket – but good luck picking that asset class moving forward. Is it time for international stocks to rebound more than the U.S. despite lagging for a decade? Are small caps going to outperform large caps as they traditionally do? What about technology – will it continue to outperform other large caps? Maybe you have those answers, but I don’t. However, as a long term investor, I know that diversification works over time. How does one decide what the “optimal” split is in allocation? If you look over the last 20 years, SPY has a CAGR of 5.58%, IWM 6.03%, QQQ 7.08%, and EFA 4.31%. What if we take out the recent bull run in large caps and look at the first decade of this century (2001-2010)? Things change drastically. SPY has a CARG of 3.00%, IWM 6.83%, QQQ 4.24%, and EFA 6.69%. If you expand further, you can find (thanks to Forbes): (Note: Technology was not an asset class for much of the above period). After reviewing multiple periods of time (from one year to one hundred years), several trends are clear: Small caps typically outperform large caps; Over the last 10 years, large caps have been the best performing; Technology stocks have outperformed even large caps significantly in the last decade; International stocks have consistently under performed large cap, small cap, and technology, but that trend is “recent” in the last 20 years; but International has the lowest correlation to the listed classes. There is no “magic” blend and each investor can create their own. Some people will be most comfortable with a straight 25/25/25/25 split, which takes any risk for picking which sector is going to perform the best off the table. Others will weigh the most recent better performers stronger. If we look at just the last 10 or 20 years, we would not allocate anything to international stocks. However, I personally like the low level of correlation and want at least some exposure internationally. I also expect a reversion to small caps outperforming, particularly in the near future. In my personal portfolio, I would choose: SPY 25% QQQ 25% IWM 30% EFA 20% There is no “correct” blend, as it is impossible to know which class will perform the best moving forward, particularly over long periods of time. Part of the above also contemplates some of the overlap between QQQ and SPY. Once an asset class division is decided on, all that is left to do is to implement the Leveraged Anchor strategy on each asset. This is the biggest challenge in setting things up, as it is capital intensive. Assuming 3 contracts is the smallest size one can use (3 long calls, 3 long puts 5% out of the money, 1 long put at the money, and one short put), then current minimum amounts necessary to open a Leveraged Anchor strategy: SPY: $35,000 QQQ: $30,000 IWM: $20,000 EFA: $7,500 These values are going to somewhat dictate how you divide your money among the different asset classes. For instance, it is virtually impossible, without very large sums of money, to get the splits I set out above. I could get close: SPY: $35,000 25.6% QQQ: $40,000 29.2% IWM: $46,667 34.14% EFA: $15,000 10.9% But to implement the above, I would need almost $140,000. The minimum I would need to implement any version of a diversified Anchor is still over $90,000. I would advise any client that is interested in Anchor, and who has over $100,000 to invest, that diversifying the strategy, should outperform, over long periods of time. In any given one- or two-year period, there will be outperformance by one class over the other. The goal of diversification is to reduce variability and risk, while increasing returns, over long periods. In the near future, we will begin listing out Leveraged Anchor trades for the different asset classes. Members are free to stick with SPY or come up with their own diversification blend. As always, if you would like to open a managed account, and have Lorintine Capital manage a diversified Anchor portfolio for you, we would be happy to discuss the matter. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog. Related articles: Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis Why Doesn't Anchor Roll The Long Calls?

The new tracking account was opened on January 2, 2019 when SPY was right at $249.00 with a balance of $100,000. In the tracking account, trading commissions were ignored. The initial portfolio looked like: Six contracts of the 175 calls gave us control over $105,000 of SPY, and we held $36,000 of BIL. This gave us about 140% leverage on the account, a moderate amount, but enough that we should not lag when the market increased. I have a couple of comments on our initial portfolio. First, our initial hedge was only 1.6% out of the money. During the year we changed that to 5%, allowing for a loss in the event of a small market decline but trading it off for a higher upside. Second, during the year we also “split” the hedge of the short puts and the long portfolio. The short put hedge stayed at the money, as one of the bigger risks to the portfolio is a large spread between the short put that is sold during the week and the actual put hedging it. For instance, in the above portfolio there is more than $6.00 of downside risk between the short put and its hedge. (It is more than six dollars due to the delta of the hedge compared to the delta of the short position – in other words, the short position is more sensitive to down movements than the long hedge). To offset this risk, we kept the portion of the hedge against the short puts higher. Almost immediately after opening the position and continuing throughout the year, the market took off upwards, moving over 2.5% up in the first week alone. In fact, the market moved up so quickly, we ended up having to roll the long hedge after the first month, rolling to the January 20 258 Puts when SPY hit 270. It was at this roll that we adopted the five percent out of the money hedge. The market kept moving up, resulting in us having to roll the long hedge again on April 2, 2019 when SPY hit 285. At this point we “split” the hedge and our portfolio looked like: With SPY trading at 285, the six contracts at five percent out of the money, hedging the actual long portion of the portfolio were purchased at a strike of 270. The four contracts hedging the short puts that are sold to generate income were purchased at a strike of 285 – the then current value of SPY. The market did not stop its rise, leading to another roll of the hedge on November 1, 2019. That makes three rolls up of the long hedge during one calendar year – a record number for Anchor and one that we would expect to act as a drag on the account. However, due to the leverage employed, any drag was minimal. December 30, 2019 came around, necessitating a roll of the long call position. Due to portfolio gains, the strategy also had to purchase some additional long puts to continue to hedge the entire position. After this roll, with SPY at $320.74, the portfolio looked like: Over the full year, SPY went from $249.00 to $320.74, a gain of 28.8% (31.2% including dividends). Over that same period, Leveraged Anchor increased from $100,000 to $136,094.88 – a gain of 36.1%. The final number for 2019 is 38.4% gain. In other words, the strategy outperformed the S&P 500 by 7.2%. Individual accounts will be less, as there are trading costs and commissions, but even if an individual trader’s commissions ran two percent (an extremely high number), performance is still superb. In reviewing the strategy, several points emerge: Adding forty percent of leverage resulted in outperforming the market by twenty five percent. This means the three rolls of the hedge during the year bled the account by about fifteen percent, which is to be expected. Another way of looking at this is, had we not been hedged, the performance would be higher, but if a trader did that, the trader would be significantly increasing risk; Given the outperformance, it may be worth rolling the hedge more frequently to reduce risks from downturns; Given the outperformance, it may be worth rolling the hedge of the short puts more frequently to reduce the risk from small short term pull backs and whipsawing; and For large accounts, diversifying into other instruments on other market indexes (small caps and international) should be explored. Thoughts and opinions on rolling the hedge more frequently, or on any other concerns or ideas for the strategy are always appreciated, as we are always looking to improve the strategy further. Thanks everyone for a great year, and let’s hope next year performs just as well. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog. Related articles: Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis Why Doesn't Anchor Roll The Long Calls?

I love the software, and it has saved me literally months of keying in data, so I have no issue telling others about it. Hopefully, this will also provide some more insight into the Anchor Strategy and how it was developed. In 2011 when Anchor was first being developed, testing the strategy was a Herculean task. I did not have access to any files of old option data, backtesting software or any of the programs that are available today to assist in the process of backtesting. When we had a proposed strategy, we had to painstakingly go through ThinkOrSwim’s “ThinkBack” feature that has day end option pricing. An excel spreadsheet would be created, several years of data would be typed in by hand, and then the data would be tested. If a result was not what we wanted, and, for example, we wanted to move the subject option from a 50 delta position to a 33 delta position, then it would take two more days of work just to key in the new option prices. Every minor change to the test was an effort of days. Then we were introduced to ORATS, which has made testing simpler, and helped create the current version of Leveraged Anchor that we are currently trading. It also makes answering member questions about the adaptability of the Anchor strategy much simpler. For instance, in the past few months, three different readers have asked “Can I use the Anchor Strategy or the Leveraged Anchor Strategy to trade gold through the GLD ETF?” My initial thought was “Well, it should be possible,” but thoughts and feelings aren’t exactly evidence. So, I dove into ORATS to actually test the theory. The first thing to do is to determine the cost of the long hedge, which can be done without ORATS by simply pulling up today’s options prices and looking – if the cost of the hedge is more than the average yearly gain in GLD, then there is no chance Anchor will work. For example, if GLD’s average gain over the last two years was 5% per year, but the average cost of an annual hedge was 8%, then there would be no point in checking further as hedging would be cost prohibitive. On the day of writing this article, the GLD option we would use to hedge would be the September 30, 2020 option. With GLD currently trading at 138.72, the five percent out of the money put is the 132 put, which is trading for $2.24, or less than two percent of the price of the underlying. This makes it “seem” like GLD might be a good candidate for Anchor or Leveraged Anchor because it appears to have a cheap long-term hedge compared to the performance of GLD over the past two or three years.Passing the first quick test, we need to build out a model and see if the strategy works over a longer time frame. The next thing to determine is if it is possible to pay for that hedge in a given year by selling short puts against the cost of the long hedge. If selling short puts does not have a positive annual return on average, the strategy will not work. This is where ORATS comes in handy. We start with the software by going into “Wheel” and clicking on the orange button in the top right corner that says “Create New.” This takes us to the following screen: We enter the test parameters on this page. For the initial test, we used the same parameters as for the Leveraged Anchor Strategy short puts: Symbol: GLD Strategy: Short Put Days to Expiration: Target: 24 Min: 21 Max: 30 Strike Selection: Target .55 Min .49 Max .59 Exit Profit Loss %: Min: blank Max 1.66 Exit DTE 1 Then click “submit.” Processing can take several minutes, so be patient with the system. When done, it spits out the results: The good news is that there is a positive annual average return. It’s even better that the positive return is in excess of the annual cost of the hedge. However, for our testing purposes, the real value comes in the monthly returns the software provides: We can now use those monthly returns to start modeling a Leveraged Anchor Strategy in excel. I simply cut and paste the data into my spreadsheet, where I can then manipulate it. Our next step is to find out the returns of the deep in the money long calls (the leveraged portion of Levered Anchor). Here, we simply go back to “Create New” in Orats and change our strategy inputs to: Symbol: GLD Strategy: LongCall Days to Expiration: Target 366 Min 365 Max 430 Strike Selection Target .95 Min 0.94 Max 1 Remember, we use a minimum of 365 to ensure long term capital gains treatment on the long holdings. Since we’ll always be holding this to expiration, the rest of the fields are left blank Click “Submit” And we get the following results: However, this doesn’t look right. It says we’re only in the market 85.39% of the days, and we should be in the market close to 100% of the time. This most likely means our “days to expiration” field wasn’t big enough and there might not have been an option available. So we re-run the test, changing the max days from 430 to 460. After doing this, similar results come out and we still are not in the market enough. At this point, I go to the individual month returns to determine what is wrong. After digging into the data that was returned, we realize that the software doesn’t support GLD options prior to October 2009, so we had a long period of just being in “cash.” This issue can be fixed by editing our test in the “Date Range” category and changing the start date to 2009-10-01, which gives us: These results are not near as good, showing an annual return of just under two percent. In fact, this seems quite low, so we need to do a data check. Since this is a deep in the money call position, returns should be near what stock performance has been over the same period. GLD’s performance is easily found on yahoo finance or any other stock data site. Since November 2009, the current prices of GLD has increased from 115 to 138 or 20% (2% per year). We’re trading a 95 delta position, so we would expect our returns to be 1.9% per year and got 1.82%. In other words, these returns are likely correct (and I note that gold has not performed well over the last decade, at all). We then copy the same monthly data into our excel spreadsheet. For our last piece, we need to run the returns for the long puts (the hedge): Symbol: GLD Strategy: Long Put Days to Expiration: Target 365 Min 320 Max 430 Strike Selection (stockOTMPercentage) Target .95 Min: .93 Max .98 Date Range: 2009-10-01 to Current Exit DTE 21 Exit Profit Loss % Min .33 The last category (Exit Profit Loss %) is the only one I don’t like. Since we roll the long hedge when the underlying has gone up around 7.5%, it’s really difficult to determine what the loss on the long put would be at that point, as its variable depending on how many days are left in the long hedge, current market volatility, and other factors. For instance, if the market in GLD moves up 8% in the first week after opening the position, the long put may only lose 50% of its value. We would typically roll the position then, but the software would not. Whereas if the market goes up 10% in a week with a month to expiration, it may lose 90% of its value, but the hedge would have rolled a bit too early in the software. However, we are not using the software to do a to the penny backtest at this point, rather testing the theory. So the 33% is really more a “guess” for purposes of this initial test. If it passes, when conducting a “full” Anchor Test, I leave the Exit Profit Loss category blank, go back through manually from the long call data and flag exactly when the rolls will occur. This is a slight increase in labor but not much. (Though if ORATS were to build in a feature that had entries/exits based on moves of the underlying, that would be a great feature addon). And with all of the above information, we now have the return information for the short puts, the long calls, and the long puts, and can manipulate it as necessary to determine an “optimum” level of leveraged, hedging, and whatever else would like to include in implementing Anchor on GLD. Once that process is done, you can see how the strategy performs, which unfortunately, is “not that well.” Changing leveraged ratios around really doesn’t help much. Digging into the data demonstrates why – when there’s a big downturn in the price of GLD, the hedge does not move accordingly unless expiration is near. For instance, in September 2011, when the price dropped around 15%, the long puts only went up about 3.5%. (Differences in long term vs short term volatility). Anchor always performs the worst on instruments that remain “mostly flat.” Over the last decade, GLD has moved less than two percent per year on average. There are periods where Anchor would have worked quite well on GLD, for instance 2009-2012 and even into 2013. However, since mid-2013, the price of GLD has remained in a tight range, which isn’t good for Anchor. As this is not a historically unusual trading patter for GLD, it basically rules out using the Anchor strategy on it. Logically this makes sense, as historically gold has been a good inflation hedge. With annual inflation over the last 5 years or so being under control, one would not expect the price of GLD to move much – and it hasn’t. ORATS simply helped verify these conclusions. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog. Related articles Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis Why Doesn't Anchor Roll The Long Calls?

When Anchor originally started in 2012, it consisted of a basket of stocks that we selected using a variety of methods (a blend of CAPSLIM, momentum, PEG and dividend growth). The strategy created a basket of stocks we felt would outperform the S&P500 over the coming year, then we hedged using SPY options. The premises was that using our knowledge we could choose stocks that would either perform with or outperform the market index, and they would be hedged with and against a broad market decline using SPY put options allowing us to gain excess returns. In 2012 and 2013, it worked like a charm. Then came 2014, when our portfolio underperformed the market. Anchor was heavily concentrated in dividend stocks that underperformed the market. This led to an unacceptable condition – our hedge losing value faster than our stocks were gaining. In other words, we were not properly hedged – which was the entire point of the strategy. After a full year and a half of sub-par performance, Anchor abandoned the stock picking portion of the strategy and went to straight index investing. After adding the leveraged version (see other articles on this topic), Anchor fixed the lag problem in up markets, leading to the current iteration of the strategy, which to date has quite pleased us. However, as many Anchor followers have noted – why not be more diversified? A blend of investments typically performs better, has lower risk and has a much smoother growth curve over time. In the perfect world, Anchor would use a blend of indexes. Most Anchor users though do not have the capital to implement such a strategy. To use Anchor, an investor needs at least $50,000 in starting capital. This means the amount necessary to start goes up for a blended version. In the ideal world, Anchor would consist of: The cost of the hedge listed above is the cost for a full year, at the money, hedge, using a range of volatilities over the past few years as a percentage of the long position. The spread is wider than listed above (e.g. there are times when it was possible to pay more than the above prices), but I would never recommend entering the strategy at those points. Testing on the short put returns was done through ORATS, going back to 2012 (before that point, data becomes less reliable). As can be seen from 2012 to the present on both SPY and IWM, the hedge would have been mostly paid off in any given year, while there would have been some lag in paying for the hedge on EEM and EFA – but this is to be expected given the degree of underperformance in international stocks when compared to US based indexes over that same time period. The listed indexes were selected in a large part based on their option volume and liquidity should not be an issue for any of them. How much money would it take to implement a blended Leveraged Anchor portfolio? Given that you would need at least 5 contracts of each position to work the strategy with the short position, a 5% decline in the hedge point (as is done currently in Leveraged Anchor), the cheapest you could arrange would look like (using prices as of 9/23/2019): The above is not “ideal” either since the 1/3 ratio in SPY and IWM will make paying for the hedge over the course of the year difficult. That ratio works much better at the 2/5 level. However, at that level, the cost of implementing the portfolio increases to about $310,000. If I had over $300,000 that I wished to invest into the Leveraged Anchor strategy, I would diversify into other indexes and run the strategy for an extended period (over a decade). Most of our followers don’t have that amount to commit to the strategy, in which case, simply using SPY works perfectly fine. Because we expect the strategy to perform better over extended time periods using a diversified basket of ETFs, we are looking into what it would take to launch a Leveraged Anchor, across indexes as a mutual fund, private fund or ETF. If anyone has experience in that area and wishes to discuss it, please feel free to reach out. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog. Related articles Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis Why Doesn't Anchor Roll The Long Calls?

First, from a tax standpoint, there are significant advantages to holding the long calls over a year. These advantages are in the difference between long term and short-term capital gains rates. In 2018 and 2019, long term capital gains rates are: Long Term Capital Gains Rate Your Income 0% $0 - $39,375 15% $39,376 - $434,550 20% $434,551 - N/A In other words, if you are a low-income retiree, using Anchor to protect your assets with a total income under $39,375, you would not pay any taxes on your gains. Take the situation where a retiree’s sole source of income is from a stock portfolio of $500,000 with half in Anchor and half in long-term muni-bonds yielding 2.31%. During the year, Anchor appreciates 10%. The investor would receive $5,775 in interest on the muni-bonds and $25,000 from Anchor, as well as a few thousand dollars in BIL dividends. This investor is below the $39,375 income threshold, so would owe no taxes on the investments that year. Whereas if the investor had sold the calls in less than a year, they would owe short-term taxes (12% rate covers $9,701 to $39,475). The investor, living on the low-income from his portfolio, saved almost $3,000 by simply holding the gains in the long calls for over a year. The difference is no less startling for investors with huge portfolios. Let’s take Investor #2, who has invested $10,000,000 into Leveraged Anchor (NOTE: If you have $10m, don’t invest every penny into any single strategy, ever). The investment made $1m on Anchor and the tax bracket for Investor #2 is 37% -- instead of 20% from long term gains. They would save over $170,000 in taxes, merely by holding over a year. (Note: Yes, I am aware of how blended tax rates work, the above numbers are going to be slightly off, as the $10m investor’s blended tax rate is probably closer to 35%). For tax purposes alone, selling to roll makes little sense. However, even if taxes don’t weight into your considerations, the delta of the position should. When Leveraged Anchor opens its long call position, it does so around a 90 delta (95 is better, but that’s difficult to find right now). The further in the money and the closer to expiration the position gets, the higher that delta goes. For those who do not remember what delta represents, delta is the amount an option price moves for a $1 move in the underlying. So, if our delta is 95 and the price of SPY moves $1, we would expect the price of our option to go up or down by only $0.95 (ninety-five cents). In other words, we will lag by the delta spread in a bull market (if delta is 95, the delta spread is 5%). Part of the reason Leveraged Anchor changed to its present format was to try to eliminate the lag in bull markets. This means a higher delta closer to 1 is better for our strategy. There is no reason to sell a 98 delta position to switch to a 90 delta position if the position is not near expiration. Doing so would hurt future performance in bull markets. Is there ever a time to sell the long calls prior to expiration other than the investor needing capital returned? Yes – in the event investors decide to change their risk and leverage profiles. For instance, investors could take on more leverage and increase their risk profiles. Currently, Leveraged Anchor is in the December 2019 175 Calls, which are trading around $118 and a 91 delta. These could be sold and reinvested in a strike such as the June 30, 2020 199 calls, currently trading at $94 and also a 91 delta. This could increase the leverage in the portfolios by just over 20%. In a bull market, their returns would significantly increase. Similarly, investors could move to the June 30, 2020 calls and invest less money and move some of the gains to BIL. Doing so would reduce leverage in their portfolios. Such decisions should be made by investors on a “what can I stand to lose” pain test. This number shouldn’t change that often and should only change due to life events such as retiring, losing jobs, getting older, paying for a kids college, etc. Risk should not change because you “feel” differently about the market – that is irrational investing. Leveraged Anchor is a long-term strategy, it should not be changed dependent on your thoughts, the media’s thoughts, or the like. It is structured to protect against catastrophic market failure. Restructuring comes with costs and should only been done for reasons contemplated ahead of time. We will discuss calculating “max loss” on Anchor in a coming post. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog. Related articles: Leveraged Anchor Implementation Leveraged Anchor Is Boosting Performance Leveraged Anchor: A Three Month Review Anchor Maximum Drawdown Analysis

Below is a presentation of both calculations. Note this is a discussion on the current portfolio. Actual losses in new or differently structured portfolios may vary dramatically. The current Leveraged Anchor portfolio looks like (as of July 15, 2019): Before we continue, lets take a look at the model we posted in our Leveraged Anchor Implementation article when we just started the Leveraged Anchor implementation: The current implementation is using 50% leverage. SPY was up around 20% YTD on July 15, 2019. Based on the table, the Anchor was expected to slightly lag (1-2%). In reality, it produced 23.8% return, actually outperforming the markets. Now, lets look at the maximum loss. It is going to occur at some point after the long call is worth zero. Hypothetically, that would occur Dec 31 when there is zero time value left in the long calls. Let’s say there’s a catastrophic September 11 type event, and the markets open on December 31 at SPY 175. We picked 175 because that’s the “worst case” ending price of SPY. If it continues to go down after that point, our long puts become more profitable. In this hypothetical on December 31, the Leveraged Anchor Portfolio would look like: Our starting investment of the year was $100,000. In the event that the market declines 41% from its current position (30% from the start of the year price), the Leveraged Anchor portfolio would be down 7.5% on the year -- and that’s ignoring any additional cash we’d get between now and the end of the year from BIL dividends and put rolls. At that same time, the market as a whole would be down just over 30%. In other words, a good result. For those who want to see what a bigger crash would look (as opposed to just trusting that bigger crashes are better), below assumes a price of SPY 100 on December 31: As noted earlier, the farther the market drops below 175, the better the Leveraged Anchor will perform. If the market dropped 60% YTD, Anchor would be up 37.7%. As currently constructed if we make no more trades, the worst case scenario of the year is down 7.5%. This is significantly better than being simply long in the market. However, all of the above assumes a “static” investment – ignoring the rolls of the short puts, the return of BIL, and other dynamic events. It is entirely possible to end with a result worse than above if the market enters a prolonged “slow” decline, as you would lose some on the short puts each time they were rolled. Take the following example which assumes that on July 29, the market is at SPY 295.5 – only slightly below our present price of around 298.5 (prices were derived using CBOE’s option calculator): Due to the small decline in SPY, a loss on the short puts would be realized, but the benefit of the long puts has not really kicked in. This can easily continue until SPY gets to the 270 range. If the market follows a down trending pattern which looks like: then we end up with the true worst case scenario, as not only have the long calls lost value, but we have lost value rolling the short puts every three weeks. Note to reach this worst case scenario, there is a price decline over 3 weeks, so we fully realize the loss on the sort puts, but then there’s a market rebound leading to a sale of a put at a higher level (that is not quite as high as the original price), followed by another 3 week decline. Both Leveraged Anchor and Anchor suffer the most when there is a 3 week market decline, followed by a rebound back up, followed by a three week decline, and this pattern continues for an extended time. This can lead to the bleeding of a few thousand dollars each roll period. If you assume that style of decline over the entire year leading up to the long call expiration (7 more three week periods), it would be possible to lose another $20,000 or so, just depending on the angle of descent of the market decline – the shallower the decline, the worse off Anchor would be. This is part of the reason why Leveraged Anchor has the short puts hedged at the money, while the long calls are hedged five percent out of the money. By hedging the short puts at the money, we reduce the potential drawdowns from a slow decline pattern. Of course, in the history of the stock market, the above charted pattern has never declined in that orderly of a fashion for a six month period, much less an entire year. It’s much more frequent to have sharper declines, rebounds back above the original price, flat periods, etc.. The chance of going down then back up almost to the starting point, then back down – all on exact 3 week cycles, isn’t likely, but it could happen. Once the stairstep down pattern hits the long hedge, small bleeding really starts to be limited, as that hedge goes up in value. In this worst case, performance of the Anchor strategy will be the worst in a market with an extended pattern as graphed above until the hedge kicks in. This result would be worse than the 7.5% “one day” catastrophic worst case loss scenario. In our opinion, the “worst” loss someone should expect in the current portfolio is somewhere around a 15% decline from the starting $100,000 investment. That would require significant “stair stepping” down, in three-week cycles, and the price of SPY ending up right at 175 in December. That is an awfully specific set of conditions that has to be met to reach that point, but it certainly could happen. (Note: this is not the maximum theoretical loss, rather our maximum expected loss. The maximum possible loss should everything go wrong is higher). Remember, the above is a “worst case” analysis – which Anchor is certainly designed to combat and provide better alternatives than simply being in the market. The above analysis shows Anchor will still significantly out-perform the market in major declines, but it is not “lossless” as some people believe. Personally, I greatly appreciate the tradeoff in a catastrophic event or even in sharp downturns. But I also understand the risks, worst case scenarios, and the market conditions which damage the trade the most. Anyone trading the strategy should have such an understanding. If you would like to give it a try, you can sign up here. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog. Related articles: Leveraged Anchor Implementation Leveraged Anchor Is Boosting Performance Leveraged Anchor: A Three Month Review

Steady Momentum In the first 5 months of 2019, Steady Momentum 6.7% return. This compares to 3.2% return for our PUTW benchmark. Not only our strategy outperformed the benchmark, but it did it with less volatility. May was a good example how the strategy can reduce the volatility of your portfolio. While S&P 500 was down 6.6%, Steady Momentum was down only 1.8%. The term risk premium (IEI-BIL) was positive this month, with IEI outperforming BIL by 160 bps (1.81% vs. 0.21%). Overall, it was a strong month for our strategy on a relative return basis, and the strategy is performing very well so far. Over the long term, the put write strategy is expected (based on historical data) to produce stocks like (or slightly better) returns with about 30% less volatility. Anchor Trades On May 4 (when we last received the BIL dividend), SPY hit 294.75, which was the high transaction point for Anchor. Over the past several weeks, we've finally experienced a "significant" market decline, from our transaction peak and from the last time I rolled the long hedge. Specifically, the market is down 6.50% over that period and 2.3% since our last roll of the long hedge. How is the strategy performing during this down move on the market? Since our last roll of the short hedge (5/19), in Leveraged Anchor, SPY has declined 2.3% and we've declined 2.45% -- that's actually a GREAT result. Our long position is levered, we have a short option position that is hurt in declines, and we're declining at close to the same rate as the market. Remember, the strategy was "adjusted" to accept some of these draw-downs in exchange for a cheaper hedge. The hedge won't really start kicking into gear until it's hit. It's at 270 -- so until SPY is below 270, if we can track market losses, in a leveraged account, above our hedged price, that's a stellar result. In January, our account started with $100k in the Leveraged Anchor and SPY was at $249. SPY is currently at $278.59 and our account is at $113,225. That means our Leveraged Account is up 13.22% while SPY is up 11.88%. In other words, we're still beating the market in a hedged strategy. To say that result exceeds our expectations is an understatement. We had an amazing bull run to the start of the year, where we had to roll our long hedge (rolling the long hedge during the year is always a significant cost and, historically), one of the biggest drags on Anchor performance. We then have had a swift drop from that point, resulting in losses on the short puts -- but the losses aren't exceeding what is expected and having them hedged at a higher point than the entire portfolio has been helpful. Summary We are very pleased with the performance of both strategies. Remember: those strategies are designed to reduce the volatility of your portfolio, and provide you protection in case of a big market decline. When the next bear market finally comes, you will be protected and able to stay in the game. Related articles: Leveraged Anchor Implementation Leveraged Anchor: A Three Month Review Steady Momentum ETF Portfolio Equity Index Put Writing For The Long Run

For those who may not be familiar, the original Anchor strategy invested approximately ninety percent of its holding in broad market S&P 500 ETFs and hedged 100% of that value using long dated put options (typically a year out) with the other ten percent of the funds (depending on market conditions, a full year at the money hedge can range from 5% to 12% of the value of the portfolio). Over time, we would attempt to pay for this hedge using a short put selling strategy. Over the years, a few shortcomings in Anchor were identified. First and foremost was the certainty that it would always lag the S&P 500. Since only 90% of the investment is in S&P 500 ETFs, at the very best, Anchor would lag 10% behind. Also, in bull markets where the long hedge had to be frequently rolled, the cost of hedging could become prohibitive. To combat these issues, Leveraged Anchor was developed. Instead of owning actual ETFs, deep in the money calls are purchased. Depending on their risk tolerances, this allows investors to end up owning the equivalent of 125%-200% of just long, without using all of their investment capital. (Options allow for leverage). Extra funds can be invested in secure assets, such as BIL, which currently yield around 2.25%. The second change implemented was no longer buying an at-the-money hedge, instead buying approximately five percent down. This means the portfolio can suffer a five percent loss that the older Anchor would not have, but given that it makes the cost of the hedge significantly less, we felt as if the slight increase in loss was more than increased by the savings in the hedge. This has largely eliminated the drag on the portfolio from the cost of hedging. Prior to implementing the changes to Leveraged Anchor, a decade long back-test was conducted followed by six months of paper trading. Three months in, having gone to live trading, these changes have been performing exactly as anticipated. Since January 1, 2019 when we started officially tracking the leveraged version of the Anchor, the Anchor model portfolio produced a 14.9% gain, compared to 13.1% gain of S&P 500. In that three month period, despite having to roll the long hedge up once (and thereby incurring a new cost very quickly into the year), Leveraged Anchor has outperformed the S&P 500, while maintaining its hedge. We would have been content, given the fast roll, to be lagging slightly at this point, but that has not occurred. So far (and it’s a very short so far period), actual performance has exceeded expectations. However, we are always striving to improve the strategy. When analyzing the current trade setup, the biggest potential risk comes from the short positions. Short positions, when rolled, are typically rolled one to two strikes (around a 55 delta) in the money. This means, if the market falls, these short puts will lose value quickly, thereby harming the portfolio. The risk of loss on the short puts is limited, because they also are hedged. In traditional Anchor, the short puts were hedged at the money, just as the underlying ETFs were. When switching to Leveraged Anchor, we also moved the hedge on the short puts to 5% out of the money. Practicality, this means as the market goes up, our risk from the short puts increases. Here’s a simple example: Assume SPY is trading at $100; Assume we need 5 puts to hedge our portfolio. We buy 5% out of the money and buy our long puts at $95; Assume we need to buy an additional 2 long puts to hedge the short selling we’ll be doing. We buy those at $95; The market increases to $105. We are now selling puts at $107 (two strikes in the money); If the market falls back to $95, those short puts lose $17 each – a significant loss; and Our long puts actually would have LOST value over this time due to time decay. In other words, we are at the exact same starting price of the S&P 500, but we’ve lost money (not $17, because we would have made some money selling puts as the market rose, but we still would have lost). Whereas, any investor that had just owned SPY would be flat. If possible, we’d like to avoid this situation as much as possible. In initial testing, it’s beginning to look like having a 5% out of the money hedge for the long portion (which is the most expensive part) and an at the money hedge for the short puts, may be more advantageous. Similarly, we roll the long hedge after the market has moved up around 7.5% and always by 10%. It may be prudent to roll up the hedge on the short puts more frequently – at closer to the 5% mark. This would reduce losses on short term, and smaller amount, downward market fluctuations, without significantly increasing the cost of the portfolio. The disadvantages to such a move are (a) it does increase cost, which will hurt performance, and (b) it increases the trades complexity through the number of moving parts and adjustments which occur. However, if we can reduce risk further while still tracking the S&P 500 in up markets, we still meet our overall objectives. I would like to invite our members to comment and question on these possible small changes. Many of our improvements to the strategy have come through investor critiques and suggestions. Feel free to ask questions and to share your thoughts. If you are not a member yet, we invite you to give it a chance. 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. Related articles Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update Leveraged Anchor Implementation

For those who don’t know what Anchor or the Leveraged Anchor is – a brief background: Anchor Trades were created to address a common desire, the ability to participate in up markets without being at major risk in down markets. There are a plethora of insurance/annuity products that seek to address this, however such products are often hampered by fees, penalties for cashing out or trading out, and caps on gains. Anchor was created to address those concerns. Originally the plan was to take a long position (such as in SPY or other ETFs) and one hundred percent hedge the position using one year put options. The problem with such an approach is the hedge typically cost between 7%-12% of the total portfolio, which makes it cost prohibitive…unless we can come up with a way to “pay for the hedge.” Anchor attempts to pay for the hedge by selling calendar put spreads on the theory that short term volatility is priced at a higher premium than long term volatility. By way of a simple example, a one year out at the money put might cost $12.00. Yet that same at the money put only one month out likely cost $2.00. So if you were to hedge your portfolio every month, as opposed to yearly, it would cost twice a much. All other things being equal, you should be able to cover the cost of a long dated put by selling short dated puts. Of course it’s not that easy in practice as the markets don’t stay flat. But that is the basic premise behind Anchor. Anchor’s primary defect, which was proved over the last 5-10 years of bull markets is that it consistently lags behind the market in up markets. This makes sense as an Anchor portfolio is only 90% long and devotes about 10% to the hedge. That means in the best case, Anchor is going to lag the market 10%. In reality, it typically lags a bit more. In prolonged bull markets, this leads people to abandon the strategy (often near a market crash). So to address the concern, we began looking at how to increase performance in bull markets, without hurting to much in down markets. (There always is a trade off, but the plan is to make it as little as possible). As discussed in earlier comments on the Leveraged Anchor trade, it carries several benefits that Traditional Anchor and/or simply being long the market does not: By using deep in the money call positions, as opposed to long stock positions, we are able to gain leverage without having to utilize margin interest. Given the rising interest rate environment we are in, and the high cost of margin interest rates generally, this can lead to significant savings; When we enter the trade, we look for a long call that has a delta of around 90. As the market falls, delta will shrink. For instance, if SPY were to decline ten percent, our long calls would have declined by less than nine percent. The closer we get to our long strike, the slower this decline; In the event of very large crashes, we can actually make money. Losses are capped. In the above example, the maximum loss is 9.5%. This can increase if we keep rolling the short puts throughout the downturn, but in any one “crash,” losses are limited to the ten percentage point mark (in Traditional Anchor this 9.5% max loss in one period is better, coming in at 8.5%). If we apply a momentum filter as well, then the risk of continuingly losing on the short puts declines; In larger bull markets, the Leveraged Anchor outperforms both Traditional Anchor and simply being long stock as there is actual leverage being used. Some of this will depend on just how fast the market is rising and how often the long hedge is rolled, but in large bull markets, it should still regularly outperform. In fact, in any one period where the market grows more than 3.5% to 4.0%, the Leveraged Anchor will outperform simply being long SPY. The Leveraged version of Anchor will always outperform Traditional Anchor in any up markets. This is the thirty day performance of the Leveraged Anchor portfolio entered today, at different possible market prices. Note what starts to happen as SPY continues to decline below the 200 point – the value of the portfolio actions starts increasing again. By SPY 150 the portfolio is back into positive territory – even though the market has declined 40%. In reality, this is unlikely to happen, but if a fifty percent or more market drop were to occur, this would be a great benefit. (Note: this happens with Traditional Anchor as well, just at a slower rate); One question that must be addressed is just how much leverage to use? Luckily this is very easy to model on a thirty day period: Above is a table showing the performance of SPY, then using 25% leverage, 50%, and 75% leverage after certain market moves over a thirty day period. After reviewing the above, and similar tables over longer periods of time, we made a decision that utilizing 50% leverage was optimal. You of course can adjust, taking on more leverage, or less, as you see fit. Note the above table does not include any gains from BIL dividends. That should add around 10 to 20 basis points more performance per month on the leveraged versions. A word of caution on the above table -- it cannot simply be extracted to longer periods of time because of the short puts. This is particularly true on the down side. When we roll the short puts after 25-30 days, we realize a loss on those positions. If we re-enter the short puts, as the strategy calls for, and the market keeps going down, the above stated losses could increase. The official trade we entered was posted this week on the forum. The six contracts of SPY gives us control over 600 shares, which at a current price of $249/share, provides control over $149,400 of stock – or right at 1.5x leverage. BIL is currently yielding right around 2.3 percent after the most recent interest rate increases. Given that almost half of our portfolio is invested in this, that will “goose” the portfolio an extra 1.15% per year. It also provides quite a bit of flexibility to roll the long hedge up, cover losses on the short hedges, or to rebalance the whole portfolio after larger gains. We’re looking forward to the coming year and continuing to work with everyone at Steady Options. Related articles: Anchor Trades Portfolio Launched Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2 Leveraged Anchor Update

Selling calls for a credit to help offset the cost of the hedge is, more often than not, a losing strategy over time in the Anchor strategy. It tends to hurt performance more than help it; About a month is the ideal period for selling short puts over both in bull and bear markets. This tends to be the ideal trade off between decay, being able to hold through minor price fluctuations, and available extrinsic value. Since options come out weekly, we’ll be using a 28-day period; Rolling on a set day like Friday is not the most efficient method of rolling the short puts. Rather having a profit target of between 35% to 50%, and rolling when that target is hit, leads to vastly improved outcomes. Waiting until profits get above 50% tends to start negatively impacting the trade on average. This month we’re going to look at another technique which has the possibility of increasing Anchor’s performance over time – namely reducing the hedge. Reducing the Hedge The single biggest cost to Anchor is the hedge. Depending on when the hedge is purchased, it can cost anywhere from 5% to 15% of the value of the entire portfolio. In large bull markets, which result in having to roll the hedge up several times in a year, we have seen this cost eat a substantial part of the gains in the underlying stocks and/or ETFs. There is also the issue of not being “fully” invested and this resulting in lagging the market. If the cost of the hedge is 8%, then we are only 92% long. In other words if our ETFs go up 100 points, our portfolio would only go up 92 points. A large hedge cost also has a negative impact at the start of a bear market as well due to the losses on the short puts. If the market drops a mild amount, particularly soon after purchasing the hedge, the losses on the short puts will exceed the gains on the long puts, negatively impacting performance. This loss is less noticeable as the long hedge gets nearer to expiration and/or market losses increase as delta of the long hedge and the short puts both end up about the same. However, as was seen a few years ago, if the market drops slightly, then rebounds, those losses on the short puts are realized and any gains on the long puts are lost when the market rebounds. If there was a way to reduce the cost of the hedge, without dramatically increasing risk, the entire strategy would benefit. A possible solution comes from slightly “under hedging.” Testing over the periods from 2012 to the present and from 2007 to the present has revealed if we only hedged 95% of the portfolio, returns would be significantly improved. Let’s take a look at the data from the close of market on September 14, 2018, when SPY was at 290.88. If we were to enter the hedge, we would have bought the September 20, 2019 290 Puts for $14.96. If we have a theoretical $90,000 portfolio, it would take 3.1 puts to hedge (we can’t have 3.1puts so we’ll round down to 3). At that price, three puts would cost $4,488 or 5% of the portfolio (almost historically low). However, if we were to say “I am not upset if I lose five percent of my portfolio value due to market movements; I am just really worried about large losses,” we could buy the 275 puts instead of the 290. The 275 puts are trading at $10.61 – a discount of thirty percent. This means we need less short puts to pay for the position, paying for the position is a simpler process, and rolling up in a large bull market is cheaper. Yes it comes at a cost – risking the first five percent – but given the stock markets trend positive over time, this pays off in spades over longer investment horizons. Even if you are near retirement, any planning you do should not be largely impacted by a five percent loss, but the gains which can come from (a) having a larger portion of your portfolio invested in long positions instead of the hedge (meaning less lag in market gains), (b) having less risk on the short puts in minor market fluctuations, and (c) paying for the hedge in full more frequently more than offset that over time. We will implement this in the official Anchor portfolios by simply delaying a roll up from gains. The official portfolio is in the January 19, 2019 280 puts. We’d normally roll around a 7% or 10% gain (or around SPY 300), instead we’ll just hold until we get to our five percent margin. OR when we roll the long puts around the start of December, we’ll then roll out and down to hit our target. Note – if you do want to continue to be “fully” hedged, you can do so. There’s nothing wrong with this, you just sacrifice significant upside potential and will be continuing to perform as Anchor has recently. If we had implemented this change in 2012, Anchor’s performance would have been more than five percent per year higher. This is not an insignificant difference. Related articles: Defining The Anchor Strategy Market Thoughts And Anchor Update Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel)

First it is important to understand what is the goal of the Anchor trades: it is to prevent loss of capital while still generating a positive return in all market conditions. It is NOT to outperform the market. One of the most important parts of evaluating a strategy is to appropriately set target returns and develop a good benchmark to measure relative performance. Without a known target, measuring performance internally is difficult. Without an appropriate benchmark, measuring against the competition is impossible. In order to do this, we need to break the Anchor strategy down into its key components for evaluation. Anchor is comprised of: A long ETF position that is typically 88%-92% of the total investment; A long put position that is typically 7%-10% of the investment for the hedge; and A short put position that makes up the balance to attempt to pay for the hedge. When Anchor was originally devised our goal was to slightly lag the markets in up years, stay level in flat market returns, and beat the market significantly in down years. That worked in years the market was up ten percent or less, which was the primary evaluation period. However, the past several years of bull markets have demonstrated that the term “slight lag” is not realistic or appropriate in large up markets. Given the fact that Anchor is only approximately 90% long at any given time, we automatically are behind bull market performance. For example, if the market goes up 20%, Anchor’s long ETF positions may only go up around 18%. Couple that with the fact that in significant up trending markets, the long hedge rolls multiple times per year and you end up with larger lags in rising markets – which get more pronounced the faster the market is rising. A more effective measurement would be to compare Anchor to a portfolio with comparable risk, such as a 60/40 stock/bond portfolio. However, even that is not an ideal metric, as Anchor's option hedge can significantly outperform it in bear markets, making comparisons difficult. Swan Global Investment’s Defined Risk Strategy is quite similar to Anchor. Swan does a nice job of setting expectations on their website with a “Target Return Band” shown below: The theory being that their Defined Risk Strategy should fall within or above the blue range. The red line represents the theoretical return of the S&P 500, the yellow line is the Swan’s Defined Risk Return target returns when contrasted with the S&P 500 return at the point. It is our opinion that these target bands represent an adequate projection of what results should be expected internally of the Anchor strategy as well. We will of course always work to exceed those expectations, but this will represent more realistic return projections for Anchor, particularly in large bull scenarios. Another advantage to evaluating Swan’s Defined Risk Strategy, is it now gives us an appropriate benchmark to measure against. In describing their product, Swan states: “Investing to help minimize downside risk. The market is unpredictable, making it difficult to time the markets or consistently pick outperforming stocks. That’s why we believe reducing downside risk can significantly impact wealth creation.” “The goal: to achieve positive returns while minimizing the downside risk of the equities markets.” “Key strategy elements to each of the Defined Risk Funds include: No reliance on market timing or stock selection Designed to seek consistent returns Aims to protect client assets during market downturns Always hedged, all the time, using put options” “Repeatable Four Step Investment Process Step 1: Establish Equities (using diverse ETFs) Step 2: Create the Hedge – Always hedged – We use only longer term puts, which offer the greatest cost-efficiency and stability, and then maintain that protection by rolling the hedge at least annually. As such, the DRS (Swan’s Defined Risk Strategy) is not under duress to seek protection in market downturns. Step 3: Seek to Generate Market-Neutral Cash Flow – We use options-trading expertise to provide our clients with the potential for return, regardless of market conditions. Step 4: Monitor and Adjust” To anyone who has used Anchor, this should all sound familiar. Since Swan’s impressive track record is significantly longer (going back to 1997 in different forms) than Anchor it provides proof of concept. Swan’s Class I mutual fund shares have returned the following (courtesy Morningstar) since 2013: Vs Anchor: Disclosure: Anchor's returns have not been audited by any independent third party, do not guarantee future results, and do not reflect the deduction of applicable management and/or subscription fees. Anchor’s 2013 returns were dramatically increased by the use of individual stocks which outperformed the market, as opposed to the broad market ETFs that are now used within the strategy to reduce tracking error. The following table compares Anchor returns with S&P 500 total return, expected return (as defined by Target Return Band) and Swan returns. Anchor outperformed the Swan every single year except 2014. While some investors may be frustrated that Anchor lagged the bull market in 2016 and 2017, we believe that is not so much a design flaw in Anchor, as a flaw we made in setting proper expectations. Conclusion: The Anchor objective is to produce equity like returns over a full market cycle, with reduced volatility and bear market drawdowns. Investors should expect a trade-off of reduced upside capture during extreme bull market gains. Given our belief that the long term is the only investment time frame that truly matters, we believe the strategy provides attractive mathematical and psychological benefits to investors seeking the long term growth potential of the US stock market. If you have any questions about the Anchor Strategy, how to implement it on your own, or wish to have us manage the strategy for you, contact my firm at anytime or make a post on the SteadyOptions website: Lorintine Capital Christopher Welsh: cwelsh@lorintine.com Jesse Blom: jblom@lorintine.com P: 214-800-5164 F: 214-800-5165

First, what did we add and why did we do it? Anchor has been performing quite well the past couple of years, particularly after some of the better minor adjustments we made. But as discussed in earlier blogs, it has some definite flaws, the biggest one being that, even in the best conditions, it will always lag the stock market by at least ten percent or so. This is because the strategy is only ninety percent long. Anchor consists of investing ninety percent of capital in SPY, or a series of highly correlated ETFs, and the other ten percent in the long hedge (the long hedge varies from seven percent to ten percent depending on when entered). This means if the market is up 10%, the most Anchor can be up is 9%. This is just how the strategy is designed. In our recent historically long bull market, this has frustrated many investors and has been considered a major defect in the strategy by a few investors (even if it is a conservative strategy). So we began tracking leveraged versions of the strategy, using options. We came up with two different versions of a leveraged strategy. The first using a synthetic stock position – short an at the money put and long an at the money call. Synthetic stock is significantly cheaper than buying actual stock, which enables you to put leveraged onto an account. The second version was simply purchasing a deep in the money call (over fifty percent in the money). By varying how far in the money we went, you can also lever up your account. After close to six months of tracking the two levered accounts, the first thing that jumped out is just how poorly the synthetic stock position has performed when compared to the deep in the money long call position. Our synthetic stock portfolio utilized a leverage ratio of about 5x. We were long 20 contracts of the 275 SPY options. Whereas our deep in the money portfolio only utilized leverage of about 2x, being long 7 SPY contacts. This leverage difference would account for some of the discrepancy in the two options, but not all of it. At its low point the synthetic portfolio, dropped in value to $95,000 (low points measured by days on which trades actually occurred, not every day of the portfolio). At this same point, the deep in the money portfolio was actually up almost one percent. Theory does not suggest this should happen, but it did. Going back through previous Anchor downturns, and plugging in similar portfolios, verifies that this actually will happen fairly regularly. The way the short puts and long calls interact in the synthetic structure is simply more inefficient than deep in the money long calls. Further, as the hedge does not perform well for the first 5% to 10% of market declines, the increased leverage is particularly detrimental. Conclusion? We’re abandoning the synthetic stock tracking and only tracking the deep in the money call position. In reviewing the deep in the money call position, it performed spectacularly well through the most recent downturn. Several factors contributed to that. The first does contain an element of “luck.” By implementing the rules on going to a 28 day short put position and rolling it after a fifty percent gain, we were able to “ride out” losses on the short puts and have them recover, thereby not realizing a loss. If the downturn had lasted another 7-10 days, we would have had to realize the loss. Luck is included in quotes though because the changes we implemented had already proven, more often than not, that this is exactly what would happen. Typically if the market is down 2%-3%, the long puts don’t increase in value fast enough to offset the losses in our long positions. In the most recent market moves though, the decline was quite rapid, more than 3%, and volatility significantly spiked. This means that the value of our long puts did increase at a fast enough rate to offset the losses in the long position. The fact that the long position values also slowdown their decline (as delta drops below 1), also benefited the portfolio, providing an added benefit that doesn’t exist in the normal Anchor. As of November 1, the market was actually down from the day we started tracking the leveraged Anchor portfolio (about 1%), but the leveraged Anchor version was up – outperforming even regular Anchor, which is a truly spectacular result. All in and all, we’re quite happy with how the leveraged Anchor portfolio is going and we’re going to continue to track it. Once there is a full year in, we’ll do further analysis on the amount of leverage used and determine if the “ideal” amount is 1.5x, 2.0x, 2.5x, or something else all together. Related articles Defining The Anchor Strategy Leveraged Anchor Is Boosting Performance Anchor Trades Strategy Performance Revisiting Anchor (Thanks To ORATS Wheel) Revisiting Anchor Part 2

It immediately became clear this could be used, not only for put selling testing, but to test Anchor over longer periods of time than previously done and try to find other areas to improve the strategy, which has been a core part of SteadyOptions for quite some time. After two weeks of testing, much of what Anchor has evolved to over the past few years was validated, but we also identified some areas for improvement that should increase performance of the strategy. In this article, and a future one next week, I will discuss the conclusions from our expanded optimization, back testing, and review. Later articles will dive into the implications for the leveraged versions of the Anchor Strategy, as well as the benefits of expanding Anchor by diversifying into IWM, QQQ, DIA, and potentially other indexes. I. Selling Calls for Credit Anyone who has been following Anchor recently knows we have been on a quest to find other ways to pay for the hedge. The biggest drag on the strategy is the hedge, and any way we can improve paying for the hedge cost helps. In this decade long bull market, paying for the hedge has been particularly problematic, more so in recent years. For the past few months, we’ve been structuring and testing a variety of call selling strategies in an effort to extract a few more basis points of performance out of Anchor. Initial paper trading had us optimistic, as well as the manual testing done over the previous nine months. Further, the CBOE maintains covered call indexes, which seemed to indicate that the strategy should work. We were optimistic enough to start tracking it on the forums in the leveraged anchor accounts. What a thorough back testing demonstrated was that selling naked calls on indexes, SPY in particular, is a losing strategy, or at best a breakeven one, since 2007. This is true over shorter periods of time as well, such as since 2012. If calls, three weeks and one standard deviation out are used, since 2012, the strategy would have lost a 1.6% per year. If data from 2007 is used, so as to capture 2008 and 2009, the strategy still would have lost 0.20% per year. Trying further out in time over periods such as 28 days, 45 days, or 60 days were all losers. What about putting in stop losses or profit targets – also all losers. In fact, only through extreme curve fitting, was I able to identify any possible profitable naked call selling strategy at all, and only if you use the data set from 2007 to the present – even then performance would only have gone to 0.55% per year. Then if you remove 2008 from the data set, results immediately went back to negative performance. Changing from an at the money position, to a 30 delta position did not help much either. Since 2007, selling a 30 delta one month call, would have netted you only 0.22% per year – essentially flat. Changing the delta to 10 or 60 did not help either. This result was initially puzzling, as the covered call index (BXM) is up over 50% over the last five years and 75% over the last ten – until those results are broken down. BXM is not naked call selling, it is covered call selling. Given over the last five years, the S&P 500 is up about 75%, which means call selling is responsible for 25%, or more, of BXM’s losses. If covered call selling was profitable, there would not be this drag. By eliminating the gains from the long stock positions, the returns go to negative – as indicated by our testing. The conclusion? Simple Anchor will not be selling calls as a way to gain additional income to help cover the cost of the hedge and such strategies will be removed from the leveraged versions of Anchor. II. 14 vs. 21 vs. 28 Days for the Short Puts A few years ago, we switched from selling puts either one or two weeks out to three weeks till expiration. Doing so gives the strategy more time to “be patient” in the event of small market moves down and not realize losses that did not have to be realized simply due to normal market fluctuations. When making the selection on how many days “was optimal” we used the past 18 months of actual Anchor data for back testing purposes. ORATS confirmed that over that 18 month period, 21 days was the optimal time to use. However, with more data at hand, we have been able to confirm that 28 days is a significantly better time period over history than a 21 day period. In testing, we used two data sets on SPY – from January 2012 to present and from January 2007 to present. January 2012 was picked because after that point, SPY weeklies were fully available. January 2007 was picked because that’s the furthest back in time the software’s data went. From January 2012 to the present, selling puts 21 days out, with a profit target of 30%, would have returned, on average, 8.87% per year with a Sharpe Ratio of 1.63. From 2007, a return of 5.32% was realized with a Sharpe Ratio of 0.42. Merely by increasing from 21 days to 28 days, those numbers increase to 11.08% and 2.14 for 2012 to the present and 8.52% and 0.93 for 2007 to the present. This is a massive increase. It was enough of an increase to make us question the results. If this was a more “optimum” period, as theorized, such results should hold across other, similar instruments. For both QQQ and IWM, the results held. 28 days achieved much better returns on a put selling period than 21. We also learned that rolling the short puts on a set day (Friday), anytime you can for a gain, is not close to an optimal roll period. Significant improvements can be gained by ensuring the profits are somewhere between 25%-35% prior to rolling. Interestingly, waiting till profits are in excess of 50% began to have a negative impact on results. (Profits are defined as a percentage of credit received. So if we receive $1.00 for selling a put, a thirty percent gain would occur when the price declined to $0.70) Anchor’s current put selling strategy has us making an adjustment each Friday. If there’s a gain in the position, we roll, and if not, we hold – simple rules. Unfortunately, by adhering to “simpler” rules in an effort to make the strategy easier to manage for everyone, we cost ourselves significant performance. If we rolled when a profit target was reached, regardless of day, as opposed to on a Friday at any profit point, we would have increased our returns to 11.08% and Sharpe Ratio to 2.14 from the 6.87% return and 0.7 Sharpe Ratio we have experienced since 2012 on put selling. Using the same put selling ratio we have, that means by doing Friday roles, instead of a profit target, we’ve cost ourselves between 1.5% to 2.0% per year in total performance. III. Cautionary Notes One thing to be careful with software such as ORATS is over mining and getting confused by the noise. For instance, why not pick 25% or 33% profit target instead of 30%? Once you get that granular, randomness becomes a factor. One year 25% might work significantly better and another 33% and yet another 30%. Given that there are only 12-24 trades per year, which profit target hit on that tight of a range is a bit of “luck.” For instance, if we sold a put for $1.80, a 25% profit would have the price dropping to $1.35 and at 33%, $1.21. Prices move that much intraday frequently, so trying to target the “exact” price to do everything is a fool’s errand. The inability and/or inaccuracy in trying to overly optimize is a concern in getting exact performance numbers. It is not a concern in identifying major trends. If profit targets between 1%-20% all underperform profit targets from 25%-35%, over multiple periods, clearly we should be using 25%-35%. Similarly if all results are worse over 50%, then 50% is too high. Using different instruments (IWN and QQQ) provided further verification for this process, providing a higher degree of confidence. There is also a concern that any back testing is simply “curve fitting,” and that is one hundred percent true. The data we have discussed is pulling out the optimal curve. Some of this can be combated by using different time periods (e.g. 2007 to present and 2012 to present, or even smaller periods). If the conclusions founds hold over various time periods and various instruments (QQQ and IWM), it is more likely than not that the results are not merely curve fit, but instead due to consistent trends. However, as we all know, previous results are no guarantee of future performance – they merely increase our chances. In verifying our hypothesis about 28 days and profit target rolling, we went even more granular, across SPY, QQQ, and IWM. To our relief, the results generally stood. 28 day periods are more optimal than 7, 14, 21, 35 or 45 over the vast majority of time periods. There are years “here and there” were 21 days were better and one year on IWM were 35 days was a better period. But even in those years, 28 days was the second best performing. Over any multiple year period (from 2007 to the present), our conclusions held. The same held true for profit margins. Maybe one year 20% was the best and another 45% the best, but in all multi-year periods we looked at, using a profit margin of “around” 30% was much better than a static day roll with no profit margin requirement. Because of this, starting this Friday, we will be modifying Anchor’s rolling rules. Moving forward, we will be rolling to 28 days out and rolling once profits have gotten above 30%. This means we may be rolling on days other than Friday moving forward if profit targets are obtained. We could even roll several days in a row in a bull market. If profit targets are not hit, we will continue to hold, as the strategy currently operates. Next week we’ll discuss other Anchor modifications we will be implementing to ideally further improve Anchor’s average performance.

Background An Anchor trade's goal is to prevent loss of capital while still generating a positive return in most market conditions. This strategy began with the premise that it must be possible to hedge against market losses without sacrificing all upside potential. The Anchor strategy's primary objective is to produce positive returns on an annual basis. How? Step 1 - Purchase ETF's highly correlated to the S&P 500 Step 2 - Fully hedge with S&P 500 put options Step 3 - Earn back the cost of the hedge over the course of a year You can read the full description here. Performance Since the strategy went live in 2012, Anchor has produced an 11.5% CAGR (Compound Annual Growth Rate) with 9.1% volatility, resulting in a 1.27 Sharpe Ratio. You can see the full performance here. In the same period of time, the S&P 500 index (including dividends) produced a 14.5% CAGR, with 10.7% volatility, resulting in a 1.36 Sharpe Ratio. Anchor has met its performance goal of lagging the S&P 500 by up to three percent in positive markets. Anchor performance includes commissions and fees. Since you cannot buy the S&P 500 directly, real life performance of your investment in S&P 500 will be reduced by commissions and fees, so the real life difference will be probably closer to two percent. Observations The S&P 500 has substantially outperformed it's long term average CAGR and Sharpe Ratio since 2012. It historically has a Sharpe Ratio of about 0.3 going back to 1926, yet has a Sharpe Ratio in excess of 1.3 since 2012. One universal principle in markets is reversion to the mean, which will eventually catch up to the S&P 500. The Anchor strategy could have potentially preserved capital during crisis periods such as 2008. In real trading, you can get a feel for how the option hedge can protect your portfolio by looking at August 2015 and January 2016, where the S&P 500 was down 5-6% while Anchor avoided losses. The goal of the Anchor strategy is to provide protection from bear markets and unpredictable surprise events. The S&P 500 has experienced four years of negative performance since 2000, for a cumulative loss of more than 80%, and multi standard deviation downside price shocks occur much more frequently than probability distributions predict. The day following "Brexit", the S&P 500 moved 4.7 standard deviations which is expected to occur less than once a century based on probability distributions, yet there has been close to 50 one day losses of 4 standard deviations or more since 1950. Markets can't be contained to probability distributions or academic theories, just ask Long Term Capital Management. The strategy is continuously being improved. For example, we switched from 2 week short options to 3 weeks. That has materially improved results, and would also have improved backtested results. Conclusion The impact of minimizing or potentially even avoiding losses in down markets should not be overlooked both mathematically and psychologically. Consider the following table, which displays the gain required to recover a prior loss. The key to the success of the strategy is combining exposure to market gains while permanently hedging against downside risk. The strategy is designed to participate in most of the market's upside while avoiding most of the market's downside. Easier said than done, but we are certainly pleased with the results to date on both a relative and absolute basis. Is the Anchor Strategy the Holy Grail? The answer is NO - in fact, no single strategy is. But we continue to improve the strategy designed to give investors the courage they need to invest confidently in the stock market for the long term. Start Your Free Trial

At SteadyOptions, we are not trying to predict when the next crash or meltdown will come. We are just trying to be prepared for all scenarios. For those of you who hold a "well diversified portfolio of high quality stocks and bonds" and believe you are protected - think again. To quote my partner Chris Welsh, “If your investment adviser has you in a small-cap fund, a mid-cap fund, a large-cap fund, a foreign investment fund, a commodity fund, a bond fund, and a high dividend fund such as a REIT or pipeline, and tells you that you’re adequately diversified, find a new investment adviser. In a market crash, ALL of those asset classes will get hammered.” So what's the answer? Protection of course. However, just buying protection is expensive. Even now when Implied Volatility is close to record lows, to fully protect your portfolio will cost you 7-10% per year. Are you willing to lag the market by 7-10% each year? Here where the Anchor Trades comes to rescue. The Anchor strategy's s primary objective is to have positive returns in all market conditions on an annual basis. It will achieve that goal in three basic steps: Step 1 - Buy stocks or ETFs. Step 2 - Fully hedge. Step 3 - Earn back the cost of the hedge. You can read full details here. As we can see, the strategy performed exactly as designed: In years when the market is operating in positive conditions (defined as an over 5% return on the S&P 500 on an annualized basis) the strategy targets lagging the S&P 500 by two to three percent. In neutral markets (defined as a return on the S&P 500 on an annualized basis between -3% to 3%), the strategy targets a five to seven percent return. And in negative market years (defined as a return on the S&P 500 of -5%) the strategy targets a return of five to seven percent. In extreme down years (defined as a return on the S&P 500 of under -10%), as explained in other threads, could lead to outsized gains. The best time to start the Anchor strategy is when IV is low because you can buy the hedge really cheap. It makes perfect sense - are you buying your home insurance before your home goes on fire or after? You buy insurance when it's cheap, not when you need it. And if IV goes up, we will get more credit for the puts we sell. Protection is cheap now. If you are holding a long portfolio and are seeking to protect it against market crash, it is an excellent time to join Anchor Trades. Start Your Free Trial