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Should I place all my contracts at one strike and expiration, or split it up for diversification? Should I wait until expiration as my natural exit, or roll early? Should I handle winning trades the same way as losing trades? Should I only sell enough contracts to be fully cash secured, or use leverage? In this article, I’m going to address the question of choosing strikes based on delta, while keeping the other variables constant, in order to show some historical performance comparisons of SPX put options from 2001-2018. Whenever I make trading decisions, I always remind myself of a couple quotes from W.E. Deming… “In God we trust, all others must bring data.” “Without data you’re just another person with an opinion.” Assumptions held constant for the following backtests… Product: SPX Period: 2001-2018 Entry: 30 DTE Exit: 80% of credit received, or 5 DTE, whichever comes first Position Sizing: 100% notional/cash secured (no leverage) Collateral yield: 0% Commissions and slippage: Not included Based on those assumptions, here’s the data for trades placed at different deltas. Key observations: Higher risk has historically resulted in higher reward…As strikes move away from at the money (ATM), volatility and annualized returns both decline. This is what we would have expected to see in a world of not perfectly, but highly efficient markets. Sharpe Ratio’s increased with out-of-the-money (OTM) options. This is what I find most interesting and worthy of further discussion. Why would there be higher Sharpe Ratio’s with OTM options, and is there any opportunity based on this data? Research from AQR has come to similar conclusions that Sharpe Ratios tend to increase the further out of the money an option is sold. This might be for the same reason that we see a linear decrease in historical Sharpe Ratios for US treasuries the further out on the yield curve you go (i.e., comparing Sharpe Ratios of 1/2/5/10/30-year treasuries): Aversion to and/or constraints against the use of leverage. If you’re an investor who is unwilling or unable to use leverage, your only choice to maximize expected returns is to sell the riskiest option (ATM) and buy the riskiest treasury bond (30-year). This being a common theme among market participants can create market forces that impact prices. But if you are willing and/or able to use leverage, you could simply lever up OTM put options or shorter-term treasury futures to your desired risk level, and get paid more per dollar risked. Isn’t that the objective…the most gain with the least pain? Of course, risk cannot be eliminated…only transformed, and leverage creates risks of its own and should be used responsibly. Unfortunately, it too often isn’t. As I wrote in a recent article, excessive leverage is the number one mistake I see retail and even occasionally “professional” investors make. In our Steady Momentum strategy, we sell OTM puts and lever up to around 125% notional to give us a similar expected return as ATM puts with slightly less volatility. We also collateralize our contracts with short and intermediate term bonds instead of cash, as collateral ends up being a significant portion of total returns with put selling strategies. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

SMPW is based on a $100,000 model portfolio that sells slightly out of the money put options on global equity indexes and ETF’s. The strategy uses modest accounting leverage, targeting 125% notional exposure. The strategy also increases expected returns by holding collateral assets in short to intermediate term fixed income ETF’s. The SMPW model portfolio returned 2.75% in 2020, outperforming the PUTW benchmark return of 1.65%. Since the official February 11, 2019 inception, our SMPW approach to put writing has outperformed PUTW by 7.12%. The SMPW annualized return since inception is currently 10.59%, vs 5.74% for PUTW. One of the unique characteristics of SMPW is the level of transparency we offer to members. The long-term theory and data for the strategy has been posted on the member board and in my various blog posts, and every trade alert provides the updated account value of the model portfolio. Additionally, at the end of every month an excel spreadsheet is provided to members showing the daily account value since inception. Our members feel confident in their ability to manage the strategy in their self-directed accounts and to replicate model portfolio results. 2020 will be remembered for the record setting speed of the February and March bear market as equity prices quickly adjusted to the potential economic impact of the global pandemic. From February 19th to March 23rd the S&P 500 dropped 33%, creating the first major stress test for our strategy. As expected, our model portfolio declined along with the market as put option values increased dramatically due to the price change and volatility increase. Put writing provides a risk and return profile similar to insurance contracts. The put option buyer transfers the risk of surprise market losses to the option seller in exchange for a premium set by the supply and demand of market participants. Like an insurance company, put option sellers take on this risk with the expectation of long-term profits. If this were not true, no market participant would rationally sell puts. Occasional losses occur depending on strike selection which is similar to a deductible, providing the insurance like protection the put option buyer desires and is willing to pay for. For this reason, we believe put option writing is a sustainable alternative risk premium that can be earned in a passive manner without needing to skillfully time entries and exits. Historical market data shows a large and consistent tendency for option implied volatility to exceed realized volatility, which is in essence our source of expected profits along with the fixed income returns of our collateral ETF’s. Our model portfolio recovered to new highs from April through year end as option prices adjusted upward to the pandemic risks similar to how insurance prices often increase after claims are paid out. We enter 2021 with VIX at $22.75, which is slightly above its long-term average. With the S&P 500 at all-time highs, market participants are still pricing in the potential for volatility until there is more certainty that the pandemic and all of its economic ramifications are behind us. In 2021 the tactical element of the SMPW strategy strike selection process will be removed. The short delta of the strikes sold will no longer be determined by momentum signals, as this element of the strategy has been a net detractor to performance since inception. This decision is based on observations about how equity markets have evolved. Therefore the service will be renamed to "Steady PutWrite". We'll also be making an ETF change to our underlying fixed income collateral assets. Our approach will otherwise remain consistent, selling and rolling put contracts in a disciplined manner with the goal of continuing to add value relative to our benchmark. Below is a chart displaying the path traveled for our model portfolio since inception that is useful as a visual aid to supplement the monthly returns listed on the strategy performance page. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Related articles Combining Momentum And Put Selling Combining Momentum And Put Selling (Updated) Steady Momentum ETF Portfolio Equity Index Put Writing For The Long Run Can You "Time" The Steady Momentum PutWrite Strategy? How Steady Momentum Captures Multiple Risk Premiums Put Selling: Strike Selection Considerations

Within our Steady Momentum Put Write service, we reduce the impact of timing luck by diversifying our contracts across multiple expirations and multiple underlying products. To illustrate, we’ll use the ORATS Wheel to backtest SPY 40 delta puts using the expiration closest to 30 days. Trades are assumed to be held until expiration, at which point a new trade is initiated. We find a near double digit difference in year to date performance if trading started at the close on December 31st 2019 vs. starting on expiration Friday January 17th 2020. YTD results with 12/31 start date: +4.65% YTD results with 01/17 start date: -4.76% Difference: 9.41% Monthly returns, 12/31 start date: Monthly returns, 01/17 start date: With options, the expiration “clock” can work for or against you. This luck is an uncompensated source of risk, which we can diversify away by laddering contracts across multiple expirations. For example, if your position sizing algorithm required you to trade 4 contracts you can minimize the impact of timing luck by laddering the contracts across 4 expirations. Each week as a contract expires, you can redeploy that contract to the new expiration closest to 30 days. This keeps your total portfolio delta more stable since you’re resetting contracts at your target delta every week.Placing all contracts on the same expiration results in an undesirable portfolio delta of 0 or 1 to the underlying on a more frequent basis. This laddering approach is less time and transaction cost intensive than delta hedging, which is often used as an alternative. Summary Over time, the impact of a laddered approach may increase the risk-adjusted returns of a put write strategy by smoothing out portfolio volatility. Trades that experience bad luck are balanced out by trades that experience good luck. Combining the two sets of returns shown in this article would create an approximately breakeven result so far in 2020. Laddering, along with diversifying across products tracking other indexes such as IWM, EFA, and EEM helps increase the long-term reliability of positive returns. Put writing has a positive expected return over time due to the volatility and equity risk premiums, and our goal should be to maximize these factors as the variables that explain our returns.This is similar to an insurance company building a profitable business around the law of large numbers. By diversifying their risk of claims across many different policyholders, the probability of getting the expected outcome increases. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Related articles Combining Momentum And Put Selling Combining Momentum And Put Selling (Updated) Steady Momentum ETF Portfolio Equity Index Put Writing For The Long Run Can You "Time" The Steady Momentum PutWrite Strategy? How Steady Momentum Captures Multiple Risk Premiums Put Selling: Strike Selection Considerations

There are many potential ways to manage a short put trade, so in this article I’ll share some backtested research to look at the differences between a few methodologies. In SMPW, we benchmark our performance against an ETF that attempts to replicate a popular index, CBOE S&P 500 PutWrite Index (PUT). PUT uses a simple approach of selling front month S&P 500 puts and holding them until expiration. 33 years of historical data is available on CBOE’s website to see the results of this straightforward approach. I like to think of PUT as a broad measure of the “beta” of put writing, similar to an index like the Russell 2000 for US Small Cap stocks. We’ll test this methodology on 7 different underlying assets from 2007-2019 (the data period available in ORATS Wheel). We’ll also test entering at 45 days until expiration (DTE) with an exit at 21 DTE. Lastly, we’ll test a 30 DTE entry with exits occurring when 75% of the credit received has been earned or 5 DTE, whichever occurs first. We’ll look at both excess annualized returns, net of estimated transaction costs, as well as risk adjusted returns with the Sharpe Ratio. Sharpe Ratio is a popular risk adjusted return measurement that is calculated as annualized excess return divided by annualized volatility. Results Interpreting The Data There are many ways to interpret what this data is telling us. I prefer to increase the sample size when reviewing parameter choices by averaging results across multiple underlying assets. In this case, 7 symbols were tested over a period of 13 years, with entries assumed to occur every 7 days, creating a sample size of more than 4,500 total trades. A large sample size helps minimize the impact of any outlier trades that may have occurred during the sample period that might otherwise skew results in a way that could lead to false conclusions. Overall, it doesn’t look like there was a significant difference in results based on the trade parameters over this time period. This is good, as we prefer to see broad parameter stability. The 45 DTE to 21 DTE method produced average results that were slightly worse than the other 2 methods, which is interesting considering this approach is recommended by a popular options trading educator and brokerage firm. In SMPW, we enter our short puts around 30 DTE and look to exit when we’ve made 75% or more of the credit received or about 5 DTE, whichever occurs first. With lower priced ETF’s that represent International equities we typically wait to exit winning trades until they are worth a nickel or less, as certain brokers allow you to exit these positions commission free. The logic, which is generally supported by the data in the chart, is that rolling winning trades ahead of expiration when we’ve made most of the potential profit maymodestly increase returns over the long term since we expect the equity premium to persist. Exiting losing trades a few days before expiration slightly reduces the risk of large losses due to the negative gamma of a short option that increases as expiration approaches. Conclusion: The Power of Diversification My final point is meant to highlight the power of diversification. Looking specifically at the 30 DTE to 5 DTE results, we see an average Sharpe Ratio of 0.59. I had the ORATS Wheel combine together all 7 symbols into an equal weighted portfolio, and the result was a Sharpe Ratio of 0.76...a 29% relative increase. Diversification is a generally accepted way to either A. increase returns for the same risk or B. maintain the same return with lower risk. Diversification can be achieved in many ways, and it’s one of the most compelling opportunities for “craftsmanship alpha” in the portfolio construction process that is used in our SMPW strategy. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios. Related articles: Combining Momentum And Put Selling Combining Momentum And Put Selling (Updated) Steady Momentum ETF Portfolio Equity Index Put Writing For The Long Run Can You "Time" The Steady Momentum PutWrite Strategy? How Steady Momentum Captures Multiple Risk Premiums Put Selling: Strike Selection Considerations

Steady Momentum had an excellent first year of publication, producing significant gains in both of the published strategies. The most popular strategy writes (sells) out of the money puts on equity indexes and ETF’s, and returned 19.1% for the year. The additional strategy that invests in ETF’s and is therefore tradeable in cash accounts, returned 18.4% for the year. Since SteadyOptions is an options centric community and the PutWrite strategy is most popular, I’ll focus most of the analysis on it. Members interested in learning more about the ETF strategy can read this post. I attempt to make Steady Momentum PutWrite (SMPW) a straightforward and simple strategy to follow without sacrificing anything in the way of expected returns. This allows members to replicate our model portfolio performance with minimal difficulties. The strategy is rules-based and transparent, so members can typically anticipate when a trade is approaching. An imperfect but fair benchmark for our strategy is the ETF PUTW (WisdomTree CBOE S&P 500 PutWrite Strategy Fund). PUTW tracks the CBOE S&P 500 PutWrite Index, which writes monthly at the money puts on the S&P 500 index. PUTW returned 13.55% in 2019, so we were fortunate to beat our benchmark by approximately 5.5%. This means on both an absolute and relative basis SMPW had an excellent year. Additionally, it should be noted that the strategy returns were produced with very little downside with gains in 11 out of 12 months and a maximum drawdown on a month end basis of less than 2% and a Sharpe Ratio of approximately 3. Members should not expect SMPW to perform at this level(Sharpe Ratio 3) forever. Reviewing the long-term historical data in my various posts is a better guide of what to expect (Sharpe Ratio 0.9).From my decade + experience in advising and guiding clients and subscribers, it’s my job to manage expectations in an intellectually honest manner. When performance is excellent, like we experienced in 2019, I’m forced to remind investors that drawdowns are coming at some point. Likewise, during deep and lengthy drawdowns it’s my job to remind everyone that spring always follows winter and the best returns are often after drawdowns. I can’t predict how long this current runup will last any better than I can predict when drawdowns will end. Please study the long-term performance data closely to know what to expect in both good times and bad, and then simply stay the course for the long-term. The underlying fundamental reasons why the strategy works are both timeless and universal, such as stocks outperforming bonds, bonds outperforming cash, and put options (the equivalent of financial insurance) having a positive (negative) expected return for the seller (buyer). It’s these relationships that explain much of SMPW 2019 results. Writing put options has exposure to the underlying asset performance, so the substantial gains in the S&P 500 (31%), Russell 2000 (25%), and MSCI EAFE (22%) indexes contain the most explanatory power as these are the indexes we write puts on. Since put writing carries a beta to the underlying assets of approximately 0.5, it’s no surprise that the strategy captured less than 100% of the underlying returns. The chart below from this post is particularly illustrative, showing how S&P 500 put writing has performed in historical market environments. Over time, put writing can match or exceed the returns of the underlying asset with less volatility. Additionally, SMPM has exposure to what academics call the “term premium” (the excess returns of treasury bonds vs. treasury bills) by holding cash collateral in fixed income ETF’s. High quality short and intermediate term bonds had a good year, with IEI returned 5.70% and NEAR returned 3.55%. The PUTW benchmark keeps all collateral in US treasury bills, which returned approximately 2%, so these spreads also explain several percentage points of the SMPW outperformance. SMPW also uses a modest amount of leverage (125% target notional), which was also contributory. Given the 2019 performance of both the underlying stock and bond asset classes, SMPW performed as expected. Congratulations to all members who participated in 2019 gains, and let’s have a great 2020 together! If there’s any additional questions, please feel free to post feedback on the discussion forum or simply reply to this post. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios. Related articles: Combining Momentum And Put Selling Combining Momentum And Put Selling (Updated) Steady Momentum ETF Portfolio Equity Index Put Writing For The Long Run Can You "Time" The Steady Momentum PutWrite Strategy? How Steady Momentum Captures Multiple Risk Premiums Put Selling: Strike Selection Considerations

Our Steady Momentum ETF Portfolio (SMETF) starts with a focus on global equities. From 1971-2018, the MSCI All Country World Index (ACWI) had an annualized return of 9.52%. As a proxy for cash, US T-bills returned 4.65% during this period, meaning the global equity risk premium was 4.87% per year. As a side note, What's an ETF - The Ultimate Guide provides an excellent introduction to ETFs. Charts created at www.portfoliovisualizer.com This risk premium, known as market beta, is one that we expect to persist in the future, and it forms the foundation of our investment philosophy. The future size of the equity risk premium is of course impossible to predict, but history is a great teacher. In addition to market beta, I’ve written about other factors that drive equityreturns, such as company size (large cap vs. small cap) and relative price (value vs. growth). See my article Do All Stocks Have the Same Expected Returns? Small stocks that are also value stocks have higher than market risk, and therefore higher than market expected returns. Below I’ll add the Dimensional Small Cap Value Index to our chart as portfolio 2. Like market beta, the size and value factors have been persistent throughout time and pervasive across the world. By including US and Ex-US small cap value ETF’s in our SMETF Portfolio, we increase expected returns and diversification. But market beta risk still dominates the portfolio, meaning that whether it’s US or Ex-US, large cap or small cap, value or growth, they are still equities and tend to decline simultaneously during most periods of crisis such as 1973-1974, October 1987, 2000-2002, 2007-2009, and even more recently in Q4 2018. To manage downside exposure, there is one additional return driver that factor research has found to be robust and that meets our strict criteria. “Momentum is the biggest example (of an anomaly to EMH). It’s very difficult after that to find anything that is robust…Lots of anomalies disappear when you apply them to new data but not the momentum effect. Robustness is the name of the game…momentum is one anomaly that seems to be robust, and it is what it is, you have to live with it…it contradicts market efficiency I think, but that’s the name of the game. All scientific theories have anomalies…otherwise they’re not theories, they are reality.” –Eugene Fame, Nobel Laureate, Economic Rockstar podcast 2018 In SMETF, we incorporate momentum based on the “dual momentum” concepts pioneered by the author and blogger, Gary Antonacci. The ruleset for Gary Antonacci’s Global Equities Momentum version of dual momentum is as follows: Chart from Newfound Research article Gary’s research focuses on a 12-month lookback for a variety of valid reasons, but in our SMETF Portfolio we use an ensemble approach of multiple lookbacks to minimize parameter selection risk. We also implement a noise threshold in order to reduce unproductive turnover when portfolio changes would otherwise be small on a month to month basis. Newfound and Resolve have both written educational papers and articles on these ideas intended to build upon the excellent work of Gary Antonacci. To bring it all together, portfolio 3 in the next chart gives us a loose historical representation of how a strategy similar to our SMETF Portfolio may have performed. Rebalancing is assumed to occur monthly. No transaction costs, taxes, or other fees have been included, and past performance doesn’t guarantee future results.Investors cannot invest directly in an index. Backtested results have certain limitations that should be considered. Investors should not rely exclusively on this information to make investment decisions. Conclusion We started this article by showing how a simple globally diversified equity index has provided a significant risk premium over the last 47 years. We then built upon this base case by including additional factors such as company size and relative price. Finally, we looked to the “premier market anomaly” of momentum to further improve results. Members of Steady Momentum have access to this simple yet powerful portfolio in the form of monthly trade alerts with a small basket of ETF’s. There is also additional education on the member’s forum, along with the precise portfolio allocations. For only $79/month, we welcome you to join us on our long-term journey together as a community. Start your free trial today. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

Oftentimes I can have a conversation with the average investor about markets/trading and know what they're going to say because the same questions and comments come up time after time. We're just wired to think short term and worry about the apocalypse du jour that's likely to make the market crash soon. Rarely do I hear "Jesse, what do you think is the right lifetime investment strategy to reach my long-term financial goals." Something I've observed about option writing, is that at some point, since it's a strategy that requires you to act every month, you're going to deviate from the model because your emotions trick you into thinking you know better. The apocalypse du jour will take your mind captive, so just be aware of it. You're probably still going to eventually give in and do it even after reading this, because good advice is like Vitamin C that the body can't naturally retain on its own. It must constantly be injected! You'll say "the market is at all time-highs, it can't possibly go higher!?" The next roll will come along, and you'll decide to sit it out for a month. In fact, almost every time it's time to roll, this thought will cross your mind. And if you act on this impulse history tells us there's a roughly 80% chance you'll miss a winning trade and the market will be even higher...or flat or not down much, all situations that lead to winning short put trades (one of the many attractive qualities of the strategy). So the next roll will come around, and now you're really stuck. You thought it was too high last month, and now it's even higher! Stop and think about this for a second...go look up what the S&P 500 was at the day you were born. Since you're probably not going to do it, let me share some data. Today: SPX $2,975 12/31/99: $1,469 12/31/89: $353 12/31/79: $108 12/31/69: $92 12/31/59: $60 Note this is just the S&P 500 cash index, which excludes dividends. Dividend adjusted, which all shareholders obviously get paid, the results are much more dramatic. By definition this means it was at "nose-bleed all time high levels" year after year after year, with the occasional multi year periods of temporary decline before it resumed the permanent uptrend. How else does something average 10% per year for a century other than routinely putting in new all-time highs? So can you outguess the market? Anything is possible, but it's more probable that 10 years from now you'll look back and realize you'd have made a lot more money if you'd have just followed the dumb model. Just like most of us would if we look back at our investing career up to this point and realize we'd be better off today if we had kept it simple and bought and held a reasonable portfolio of equity ETF's or mutual funds or just sold a simple put each month. The markets are ready to endow us all with forever increasing wealth if we would just get out of our own way and allow it to happen. I believe a model is the ceiling on potential performance, not the floor. Any human intervention is likely going to cost us money over the long term. Our time is better spent in the strategy construction process than trying to outguess it during the heat of battle when emotions tend to give us tunnel vision. I believe in evidence based investing, so we can also look and try to learn lessons from the data. For example, Dimensional Fund Advisors regularly updates research about mutual funds. Here's what their most recently updated "2019 mutual fund landscape" study found. So for example, 20 years ago, there were 2,414 stock mutual funds at the beginning of the period. By 12/31/2018, only 42% even still existed. Do funds shut down because their performance was great or because it was poor? And of those that survived, only 23% outperformed their prospectus benchmark. This includes the most talented market timers and stock pickers in the world, and only 23 out of 100 could add value, net of all costs, above a basic benchmark that is available today at almost no cost (and even no expense ratio in some situations). Note that this degree of outperformance is less than would be expected by random chance alone, so attempting to just find and invest with those few winners has not been a good approach either as the data shows there is a significant degree of randomness (aka luck) in performance data. And good luck is not something that is expected to persist in the future. So what can we learn from this? If 77% of professionals can't time the market, do you really think you're going to be able to do it consistently enough over time to add value vs. just relaxing and following the simple model (meaning, the trade alerts)? When you get the urge to deviate off course, try laying down until that urge goes away. And if it's still there when you get up, ask yourself what you know that the rest of the market doesn't? A foundation of an efficient market is that all know relevant information is already reflected in the price, which is obvious in the above mutual fund data that highlights how hard it is to outguess it. A better approach is to just be prepared for the inevitable periods of outstanding performance (like we've seen since launch), along with the inevitable periods of poor performance and even double digit declines in your account value. For example, don't put your emergency fund in the strategy. Don't take out a HELOC to invest more in the strategy. Just be patient and sensible. Surprise is the mother of panic, and if you're surprised in the future when we have a double digit portfolio drawdown (because we will), it means you haven't reviewed the charts in our strategy description post or read my posts like this that attempt to remind subscribers what to expect. The market makes us money (geek speak, a combination of the equity, volatility, and term risk premiums), not my perfectly timed trade alerts. This also means the market will at times cause us to lose money, and my trade alerts will not prevent that from happening. We will accept what the markets give us, knowing that we get paid to bear risk that others don't want to take over the long term. For example, option buyers are typically hedging their position, and are willing to pay a premium to do that. We step in, and sensibly collect that premium, like an insurance company. So only take the risk that you have the ability (time horizon), willingness (emotional tolerance for volatility), and need (long term required rate of return to reach your goals) to take. Above screenshot from Ben Carlson's excellent post that has related thinking: The Problem With Intuitive Investing Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios. Related articles Combining Momentum And Put Selling Combining Momentum And Put Selling (Updated) Steady Momentum ETF Portfolio Equity Index Put Writing For The Long Run

Selling puts on the S&P 500 has been a good strategy since the mid 1980's, based on CBOE's Put Write Index (PUT). In the referenced article, I showed how adding a time series momentum filter to PUT further improved risk-adjusted results, while also mentioning that creative investors could use assets other than T-bills/money market as the underlying source of collateral. We'll also look at that here. First: Replicating the strategy in the article, how has it done out of sample the last 23 months? Notes... Equal Weight Portfolio = PUT Timing Portfolio = Times series momentum applied to PUT Vanguard 500 Index Investor = VFINX Given that the S&P 500 has been up so strongly during the last 23 months, it's no surprise that PUT underperformed the index. This is expected during strong bull markets where put selling has gains limited to the amount of monthly premium collected. The time series momentum overlay stayed invested the entire time, thereby doing its job since there were no major drawdowns along the way to avoid. Next, we can look at two examples of ways to enhance the returns of our momentum approach. First, instead of holding bonds only when momentum is negative, we'll hold bonds (instead of T-bills) all the time (via VBMFX) in addition to our put selling. This further improves results, but it should be noted that this could only be done in a non-retirement margin account. All the brokers I'm aware of would prohibit this type of portfolio in an IRA. The risk-adjusted results here are impressive for such a simple strategy. So what are the drawbacks? Here are a few to consider: 1. We saw in the last 23 months that put selling can underperform in a raging bull market. Investors could consider substituting part of their traditional equity exposure with put selling for this reason. 2. Future returns may be lower. As more market participants become aware of the strong historical risk-adjusted returns offered to those willing to sell options, more supply can impact premiums. 3. Risk-adjusted bond returns have been extraordinary since 1990 due to falling rates, with VBMFX producing a Sharpe Ratio of 0.78. This is unlikely going forward. 4. Time-series momentum can and will occasionally create whipsaw trades. Again, the solution to this is continuing to maintain a healthy portion of your equity portfolio with traditional index funds and/or ETF's. 5. The returns shown are pre-tax, and option selling is tax inefficient due to the high turnover, even after considering the special 60/40 treatment that cash settled index options receive. All of the bond income would be taxable as well (although substituting VBMFX with VWITX gives similar results). The ability to defer capital gains until sold and forever when bequeathed is one of many reasons why index funds are so attractive. One more example: Instead of collateralizing 100% of our put selling with bonds, we'll do it with 20% equities and 80% bonds. Since PUT is based on large caps, we'll add factor diversification by allocating half of the equities to a US small cap value index, and the other half to an International small cap value and emerging market value index. Adding cash equities to the portfolio further improves results, and would also improve tax efficiency. Even though this type of portfolio may be simple, its creativity makes it quite unconventional. But for someone willing to succeed unconventionally, the data suggests the minimal effort involved is worth it. And for those lacking the time, interest, or confidence to do it themselves, we run portfolios similar to this for clients if you'd like to have a discussion about it with us. Thanks for reading. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse is managing the PutWrite portfolio and forum, the LC Diversified Fund, as well as contributes to the Steady Condors newsletter.

In addition to the S&P 500, CBOE also tracks the same strategy on RUT with their index PUTR. Below is the historical data since 2001. Portfolio 1: PUT Portfolio 2: PUTR Past performance doesn't guarantee future results, and shouldn't be relied upon exclusively when making investment decisions. PUTR has beat PUT by 210 bps from 02/2001 - 05/2019, which is largely explained by the fact that IWM beat SPY by 199 bps (7.47% vs. 5.48%). This should not be thought of as random chance, as academic research has found there to be a persistent and pervasive size premium (small outperforms large...see charts below from Dimensional) in the historical data that is intuitive as a risk premium. For example, we can see that PUTR's 40% relative higher return (7.26% vs. 5.16%) came also with 25% higher risk (13.5% vs. 10.75%). Therefore the Sharpe Ratio's are similar. This is what would be expected in a world of highly (although not perfectly) efficient markets...All asset classes are expected to have roughly comparable Sharpe Ratio's over a long period of time, and therefore the best way to increase your expected Sharpe Ratio is with diversification. This same thought process of an expected long term risk premium can be applied to our usage of collateral in the form of ~ 5 yr treasuries. I had Dimensional create the following chart, highlighting the persistence of 5 yr treasuries outperforming T-bills since 1926. I hope readers find this type of scientific data analysis transformational to your way of thinking, as I know I certainly did when I first learned of it. I believe this type of thought process should inform your entire investment portfolio, not just this particular strategy. For example, this same process has also gone into the construction of our ETF portfolio alerts, which are provided to Steady Momentum subscribers at no additional charge. If you were seeking out advice for a health related issue you were having, wouldn't you rather get that advice from a professional who has spent their career studying peer reviewed scientific research vs. picking up a magazine at the checkout line at the grocery store or asking a friend/family member/co-worker what they think you should do? These sources of advice may be sincere, but the consequences of bad advice are simply too high. If so, shouldn't the same standard apply to your financial planning and investment decisions? Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

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

"The CBOE S&P 500® PutWrite Index (ticker symbol “PUT”) tracks the value of a passive investment strategy (“CBOE S&P 500 Collateralized Put Strategy”) which consists of overlaying S&P 500 (SPM) short put options over a money market account invested in one- and three-months Treasury bills. The SPX puts are struck at-the-money and are sold on a monthly basis, usually on the 3rd Friday of the month. This is called the “roll date” and it matches the date of S&P 500 option expirations." Here is the performance of PUT (Portfolio 1) vs. VFINX (Vanguard S&P 500 Index Fund) from 1990-2016: The most attractive part of PUT vs. VFINX is the improvement in risk-adjusted returns. Both volatility and maximum drawdown were cut by about a third, resulting in a nice increase in Sharpe Ratio. Even the most passive investors could benefit from this approach as the PUT selling strategy is now available in an ETF structure from Wisdom Tree. More active investors that follow our Steady Options content may be interested in replicating the PUT selling strategy themselves, saving themselves the 0.38% management fee. In addition to saving on management fees, an active investor with a creative mind can potentially further increase potential returns by keeping collateral in something other than T-bills. Momentum What if we add a trend-following, or "time-series momentum" overlay to PUT? We already know that it has been peer reviewed and validated out of sample on multiple underlyings, so why would PUT be any different? Answer: It's not. Below is the performance of all three: VFINX, PUT (Equal Weight Portfolio), and PUT with a 12 month time series momentum filter where we are invested in PUT when its rolling 12 month excess return is positive, otherwise VBMFX (Timing Portfolio). The timing portfolio reallocation period is monthly. All charts and statistics were custom generated at www.portfoliovisualizer.com. As expected, adding time-series momentum cuts off a substantial part of the left-tail of returns. This benefit can't be emphasized enough in the real world of human emotion. Sophisticated traders and investors like those following all of our content at Steady Options could benefit from this approach as part of their long-term portfolio. In our firm, we already utilize a variation of this strategy for our clients.