So far a fantastic month for the portfolio. It’s been volatile but we’re doing very well despite all of that and having ended up right at about 205 at the time of this writing. As I wrote a week or so ago:
Markets have been quite volatile since the start of the new year. The dow has had several 200 +/- points days. Price discovery amidst all of the uncertainty. What effect does low oil have on the economy? What effect does an extremely strong dollar have? Will companies report lower earnings due to the lower euro? There is the potential greek exit, the potential QE from ECB on the 22nd. Just a boat load of uncertainty and markets hate uncertainty. Through out all of the swings from 208 to 198 my overall portfolio moves about 2% up or down. This is why I’ve constructed things the way I have. Most of the 2% movement comes from the on/off volatility in the options of the SPY/TLT pair trade. If the market moves slowly down my balance barely changes but if there is a quick jolt to the same place and VIX goes up drastically, I see the balance change due to heavy pricing of the spy options.
To summarize:
Protector (Alpha + Standard): This is the all-weather portfolio. It’s a completely hedged equity portfolio. We purchase year-out ATM spy puts in the amount to 100% insure the equity and then we purchase about 30-40% in additional puts of which we sell against on a short term basis with enough extrinsic value to pay off the hedge over the course of 1 year. In essence, we purchase 140% 1-year out ATM puts, sell 40% short term puts with enough extrinsic value on a weekly basis (approx 65c) to cover the entire cost of the 140% long puts. It’s been backtested to death and works well with a very very low max draw down. A great strategy that can take on a little leverage. In essence, our portfolio is completely protected and performs in any bear markets though does slightly under perform in a prolonged bull market. Essentially, It performs in all market types but does have challenges in an on-going whip saw environment. The way I sell the puts is quite complicated and combats the whip saw weakness. This method took a few years to fine tune. All the complication is in how the weekly puts are sold.
We do a split where we have the regular old market via RSP and another half of alpha generating equities that do have correlation to the regular market so as to be protected in any bear market. The alpha generating equities is where I have some “secret sauce” ways of finding alpha. In general the alpha comes from some momentum analyis, quantitative analysis (mechanical trading) and even some 13F cloning. Our current portfolio is neutral to slightly up for January.
Momentum: This component rotates through 15 ETFs (bonds, equities, treasuries, some commodities and REITs) by selecting the top 3 which are above the 200 DMA and rotating on a monthly basis. It has a max draw down of 10-15% and expected to return 15-18% a year. It naturally avoids bear markets by selecting non-equity ETFs like TLT and VNQ. We’re currently in TLT, VNQ, LQD. Those three have provided a 6.8% return in January alone. A perfect additional hedge to our protector portfolio.
SPY/TLT pair trade: This is an option based strategy where we do a pair trade of debit spreads of SPY and TLT which are negatively correlated. We’re doing very well in this for the current month. Up about 20%. This is the highest variance portion of the portfolio and does have a smaller allocation.
Earnings Volatility trades: We’ve done a few earnings volatility trades this month (GOOG, NFLX, FB, MSFT, BABA). These are volatility based trades and are completely unrelated to any of the above.
On the Protector, how long do you keep the one year out ATM puts before you roll them into new one year puts?
Is the MIC your own creation or is it know under other names out there?
On the M3 etc., do you keep track of the Greeks on IB or use another software?
Nice blog!
Hi Adrian,
I roll the long puts when we get about 7% up or 8-12 weeks from expiry. Always figure out what extrinsic you need to sell on the shorts and eventually it pays itself.
As for the MIC, it’s a modified iron condor and sometimes goes by weirdor. I have my own spins on it. But generally it’s the same concept
The m3 requires option vue. It’s the only software that estimates the T+0 line accurately enough. ONE won’t cut it nor any others (that I know of)
Hi,
Do you have more details on the protector that you can post or email? I am interested in hedging a long term investment portfolio that contains VTI and bonds. I put and take off hedges from time to time but as you know hedging most of the portfolio is very expensive.
Thank you in advance.
Hi Adrian,
I purchase year out ATM puts enough to insure the entire portfolio, then I buy additional puts to sell against. The amount of additional puts depends on the targeted extrinsic value you want (usually 0.65-0.70c). Say you needed 70c a week, well how many puts do you need to sell in order to pay for the long puts? You can figure that out via this google doc a few guys doing have made:
https://docs.google.com/spreadsheets/d/1pnzyVEfKI7ho3HiH7Yqz5MHHlIR4bT37QWDOKt5-a3s/edit
I always sell it as DITM as I can to prevent whipsaw while still obtaining the needed extrinsic. Sometimes its not possible to obtain that extrinsic in low volatility environments.
The method for selling the puts is as follows:
1. Sell 3 weeks out
2. When you reach weekly target roll up
3. Try not to roll down for a loss just go further out in time
4. No matter how big the decline, don’t take a loss until 1 week out and even then try to roll out even 5 weeks at breakeven. Prevents whipsaw effect on the shorts.
More flexibility then that if you want but those are the general rules for getting the hedge paid for.
There is a forum subscription at http://www.steadyoptions.com (anchor) that has a small community that discuss this stuff as well as provide alerts for trading and discussing alternative strategies related.
I use the equities produced at Best8 (www.portfolio123.com) and USMVTrader at http://www.imarketsignals.com for my alpha equities plus a few others.
Hope that helps!
Thanks a lot man. You are very generous.
I will read the stuff and for sure will be back with more questions.
I hope you are taking lots of pictures of your trips. When your kids get older they will love to see all that. I just spent a few months putting all the pictures from my travels and living overseas in Google plus, and my kids (now in the middle 20’s) told me they loved it.
Good advice 🙂 It’s so true. Very important. I am taking as many pictures and videos as I can. IT was probably the only opportunity for such a trip and we just had to jump on it. They are young but I hope they have some memories from it, and at the very least, they’ll see the pics and appreciate it.
I looked at the excel. What is the Target Weekly Extrinsic (65c)? Is it the amount of premium I need to collect on a weekly basis? How do i know how much I want?
Hi Adrian,
Sorry for the delay! The travel was intense these past few days. I’ll be back to regular posting now.
The target was determined based on looking at the worst case scenerio of what could reasonably be attained while still being ITM per week with low volatility levels. To prevent whipsaws effects, you want to go as far ITM as you can while still achieving this number. If you picked $1, you’d find out that its very difficult to get that in low vol and if you picked 0.50c you’d find out it is just too low and requires a lot more puts to buy and sell against. The 0.65 to 0.70c number seemed like the best target. As you pay off the hedge this number can start to go now, further allowing you to go more ITM.