Well, you might enjoy the post above ... in that we spend less time in actually running the strategies. All the time, is spent in development.
And remember, it's the strategies themselves that are "diversified". People hear of running investments where the stocks are "diversified", so they have a Railroad, a Technology company, a Healthcare company, etc. Stocks that are diversified ... or ... as we say ... non-correlated. However, as they are all the same asset class, namely, stocks or equities ... when the market as a whole takes a dump, they find out that those non-correlated stocks become correlated to one another, very quickly.
LOL.
Not that I'm bagging on individual stock names. I'm not. We actually run a very small portion of our book (
Only 5% of the total portfolio is exposed to that strategy. Actually, now ... a little less than that), that has exposure to Intrinsic Valuation plays. Only buying on deep pull backs on a 10 year periodicity from an Intrinsic Valuation basis. So I'm not bagging on that approach at all.
But in my usual way ... I have made a short-point ... longer. LOL.
Anyways, my point is, you've heard of non-correlated, or a "diversified" portfolio of stocks. The reason people do that, is so that if one is suffering, the others, in other sectors ... are not. Sensible (
until the aforementioned broad market sell-off). Well, all we do in my space, is run
diversified strategies for the same reason.
The strategies themselves? Can be simple.
I'll give you an example of two non-correlated strategies, super simple. I don't use them myself, but if you tested them backwards, you will see that A) They don't take much to run them? B) Backtested history (
with the problems therein) they beat the S&P 500 by orders of magnitude. My point is not to talk strategy. Though we have this in our library, we don't use these. But my point is just to illustrate the above concepts, with an example.
Don't worry, I'm not breaking any NDA here. My partners and I have decided the following simple example is something we can use ... as just that. An example. And doing so helps 'de-mystify' what we do, which also helps to work against the "demonizing" we so often see in popular Financial Media streams (
which is usually 1,000% wrong).
1) A Long-Flat Strategy. Each month, at the end of the month? Check a monthly chart of the SPX. Is above or below it's 13 Period EMA?
If it's above the 13 Period EMA? You are LONG whatever your capital (
with good Margin to Equity) allows to you to be long. In other words, if you have $125,000? You can think about being long 1 ES. Knowing that you might have 20% DD's (
a crash), and you'll simply have to endure that. But if you only have $3,500? You might be long an appropriate amount of SPY. Or maybe you are in between those amounts when it comes to capital, and you can be long an appropriate amount of Micro E-Mini's. There are a million SPX products out there nowadays, so whatever one your capital allows you to be.
But you get long, and you STAY long for that ENTIRE MONTH. You don't look at it, and you don't 'tweek' it.
If it is below the 13 Period EMA? You are FLAT, and you take that capital to straight cash for the entire month.
You run that backwards 40 years? You're going to find it PRINTS money.
Needs very little time to implement.
Destroys the S&P over that time period.
Has difficulty in time periods like 2015, where it HAS to undergo a bit of chop (
every strategy has drawdowns).
The critical thing? Is making sure that the instrument you use is APPROPRIATE to your level of capital. But it doesn't matter if you have $3,000 or $300,000. You can find an APPROPRIATE instrument to use. Be it a couple of /ES contracts? Or some SPY.
Seriously, there's a little homework assignment for you. Backtest that. By hand. Go back to say, 1998, and work out how that strategy would have worked out for you. Doing that? BY HAND? It will do something else for you, that too few new traders do.
BUILD YOUR CONFIDENCE LEVEL
It's vital to have confidence in whatever strategy you decide to use, so that when it undergo's it's inevitable drawdown (
as every strategy must), you don't style-drift, and do something that I refer to as "Method-Hunting" that a lot of aspiring traders fall victim to. To have that confidence? It's good to know your data, as to how that strategy has performed in the past.
So the next question? Is looking for a non-correlated strategy. In other words, a strategy that looks NOTHING LIKE the above Long-Flat Strategy (
that you will only be looking at once every 30 days, and thus, not spending a lot of time on), and should do well, when the S&P 500 Long-Flat Strategy is not.
Let's look at a strategy, that many other's do, and is somewhat similar to a Covered Call Strategy. Only better than a Covered Call Strategy. At least, that's my personal opinion.
And I'm not the first to come up with this. I think another Pro around these parts said it ... that this strategy is quite common in some Geographic Markets.
2) A Permanent Bearish Strategy on the Markets. Do you see how this is "Non-Correlated" to the strategy above? In one, you are long or Flat the S&P 500 Index, and that strategy in itself does well enough. In this strategy? You will ALWAYS be short the market.
Non-Correlation of strategy. One strategy is doing one thing. One strategy is doing the other.
Again, there are so many products out there, you have to choose what is appropriate for your capital, and weight it appropriately to the above strategy. This is math each person must work out for themselves and their situation. Be it SPX Calls. Or QQQ Calls.
Sell OTM defined call spreads.
If a person can afford to mess with the SPX? Selling 5 Delta SPX Call Spreads with 30 point backstops (So, for example, selling 3000 SPX Calls, buying 3030 SPX Calls to define the risk).
If the Delta's get up to 20 Deltas? Roll the position to the next week (
Rolling being closing down one spread, not the loss between the credit taken in, and then the loss. Note that, and then sell NEXT weeks' CLOSER to the money, to make up for that loss, and just a little bit over that)
Sell enough contracts, to offset the long-flat strategy.
And sell them regardless of what is going on with the other strategy. So you sell them, EACH AND EVERY WEEK. If the Long-Flat strategy is Flat that month? STILL SELL the Call Spreads.
But maybe a person can't afford the SPX. Simple. Just adjust it to do it on something like QQQ.
Sell 15 Delta QQQ Call Spreads each week (
Liquidity is there now on the weeklies). Roll if the Probability of Touching ever gets to 30% Probability of touching (
Again, for those not familiar with Options, you close down the spread, and take a loss. Then note the credit you took in, and where your loss is at. Then sell the next week, a LITTLE closer to the money, maybe vary the strikes to bring in MORE credit than you lost). With the QQQ, you might be rolling and defending a little more often.
But by definition, if that's happening? Your long-flat strategy should be making you money.
So all of the above is a way to illustrate the concepts I had in previous posts.
And is a way to illustrate what we do. We don't do the above, because we have to worry about scalability. But the concepts are sound. The only difference with our strats? Is we think ours have a bit more "posh", in that honestly, we do have the time to focus on more complex, higher Sortino Arbitrage strategies.
But what we do, is very similar to other multi-strat firms.
It doesn't have to be complicated for you to make a LOT of money, as a stay at home retail trader, destroy the S&P 500 returns. All you'd be left to do with the above? Is really just monitor your deltas and roll when you need to.
