Trades: The Year so Far

For the last several years, I’ve gone deep into the “lab” working on backtests and coming up with portfolio compositions that work. The focus has been on the reduction of variance by diversification which in turn increases geometric return and lowers time spent in draw down. We aren’t perfectly diversified but every little bit helps. We focus on what we can do which is spreading out the time of entries, spreading out the types of income trades (each with their own nuances and own particulars) and we spread out the type of black swan hedge each has. A fully entered campaign takes 11-13 weeks and involves putting 1/13th the portfolio in action per week across 3-4 different types of income trades. Each week is a different spot in the market and represents different strikes. This gives us skew diversification and naturally allows for older trades to hedge/protect newer trades. Not only that, but the entries of the black swan hedges (inherent and built into each income trade) are also spread across different strikes naturally through time.

Are each of the income trades perfectly diversified? No, but they are a bit and that’s the best we can do. They each have their own quirks and weaknesses and any bit of help we can get in diversity helps with the reduction in variance especially by having their entries spread over time. As well, each income trade has it’s own brand of BSH which is quite different from each other. All of that helps.

The tests we’ve done (we can only really do from 2014) suggest an annualised return of 43% or so without the black swan factory (which is a separate portfolio of trades). We’re on target for 25% this year so far and we’re at 41.11% since April 1st, 2020. If you go 1yr, it’s better, at 50% for the last 12 calendar months. Pretty closely matching. We’ve had no Black swans since April 2020 so the results match. Now, If you couple in the BSH factory the returns go drastically up (due to the events of Aug 2015, Feb 2018 and March 2020) to an average of 70% a year backtested.

Of course, now that everything is compiled and running, I am just following the system and doing the trades as they were tested. It’s got to be the most boring year of trading I’ve ever experienced and that’s by design. It’s systematic and there’s little draw down or stress. I am fully aware that during an event or crisis, it’ll be a fun few days but there shouldn’t be any draw down to deal with, just a maniac removal of risk and locking in BS profits. It won’t be boring and that’ll come sometime but during the normal days, it’s about as benign as you can get. Systematic, emotionless, and predictable.

The active research is naturally to find a 4th or 5th strategy that we can combine into the already existing infrastructure to further reduce variance. Eyes are open but nothing makes the cut just yet. It’ll take a lot to make it into the mix. The focus now is on opportunistic addition of BSH during IVTS spikes and black swan factory composition research. My life job is to eye up new strategies (that are in my realm of skill) and to see if they’d work and fit well, to focus on convexity and composition of trades that provide convexity (positive exposure to black swan)