Barbell strategy: anyone is using it?

[Baozi]

The devil is in the details. But in general I think tails are underpriced.

except when you buy them..

 

[ironchef]

except when you buy them..

Especially when you buy them.

 

[kj5159]

It's more or less the same: investing all the amount and then buying options after bond's expiry date is like investing x% of the balance and at the same time buying options for (1 - x%) where the options premium is equal to the interests that I'll get at bond's expiration.

There's no difference.

I was very verbose but the main point I wanted to make was that Taleb goes after deep OTM options rather than ATM, but yes same idea otherwise.

 

[drm7]

Hi all, just a quick poll preceded by an explanation for those who don't know what I'm talking about.

This question is for those who don't consider themselves heavy traders but use options like a tool to aid medium and long term investment process; so your goal is not to frantically scalp the Gamma or hedge the Delta of your weekly options the day of an earnings announcement but to build a risky portfolio around the cheapest weighted average prices... then enjoy dividends and positive mark-to-market.

The barbell strategy is more like a philosophy than a real strategy because its principle can be translated differently according to the chosen instruments: I suggest to read this article to have a quick overview. What about options?

In practical terms, let you have $79,610 on your account and want to use this strategy to get exposure towards a volatile asset like SPY with zero risks:

1. 12 months ago you've bought $80,000 of a short term US Government bond. You've bought @ 99.51;
2. now the bond expires and you get $(80,000 + 1,200). So you've just earned $1,590;
3. then you buy an ATM Call expiring at 31-Mar-2020 @ 15.90, which means spending those $1,590 for the longest ATM Call you can afford;
4. if within a year SPY won't rise, the Call expires worthless, you end up with your starting $79,610 and your loss has been the inflation rate. What a pity, repeat next year;
5. On the contrary, you exercise the Call, spend about $30,000 (I'm using current values) of your $79,610 account balance, you'll find 100 shares of SPY in the portfolio with a positive performance of x% already accounted;
6. insert a GTC stop loss order on 100 SPY @ (Call strike) limit price;
7. enjoy. Maybe repeat with another volatile asset by using leftover $49,000.

Is there any investor who is currently using this strategy?

You have described the process underlying a Fixed Indexed Annuity. Over time, they return a bit more than a bond index, with similar volatility. VERY expensive products, though. You pay a high up front commission and ongoing expenses. If you can "roll your own" and minimize transaction costs, you might get slightly better returns.