If you re-examine that "Evernote" now, the very end of the note now contains a contact reference! <-- The author is very sharp!
hedging a portfolio against a black swan
- Thread starter bjw
- Start date
We implement a strategy called Anchor Trades.
Strategy highlights:
The Anchor strategy's s primary objective is to have positive returns in all market conditions on an annual basis.
Step 1 - Purchase ETF's correlated to S&P 500
Step 2 - Fully hedge with S&P 500 put options
Step 3 - Earn back the cost of the hedge over the course of a year
We do it by selling weekly puts against the long puts at certain ratio.
In years where the market is operating in positive conditions (defined as an over 5% return on the S&P 500 on an annualized basis) the strategy targets lagging the S&P 500 by two to three percent. In neutral markets (defined as a return on the S&P 500 on an annualized basis between -3% to 3%), the strategy targets a five to seven percent return. And in negative market years (defined as a return on the S&P 500 of -5%) the strategy targets a return of five to seven percent. In extreme down years (defined as a return on the S&P 500 of under -10%), as explained in other threads, could lead to outsized gains.
The impact of not experiencing losses in down market years, while only slightly lagging (if lagging at all) in positive and neutral years, is astronomical over any extended period of time. Utilizing the Anchor strategy over a number of years, particularly if any of those years are bear markets, should lead to the strategy significantly outperforming the markets as a whole, as back-testing has demonstrated. Even in prolonged bull markets, the returns should still be positive and lag negligibly behind. The peace of mind which comes with being fully hedged more than compensates for the potential of slightly underperforming the market as a whole in prolonged bull scenarios.
More details:
https://steadyoptions.com/an/
The bottom line: hedge does cost money, but Anchor strategy aims to reduce the cost significantly. Anchor 5 years CAGR is 10.1% with volatility of only 8.6% - https://steadyoptions.com/performance/
Strategy highlights:
The Anchor strategy's s primary objective is to have positive returns in all market conditions on an annual basis.
Step 1 - Purchase ETF's correlated to S&P 500
Step 2 - Fully hedge with S&P 500 put options
Step 3 - Earn back the cost of the hedge over the course of a year
We do it by selling weekly puts against the long puts at certain ratio.
In years where the market is operating in positive conditions (defined as an over 5% return on the S&P 500 on an annualized basis) the strategy targets lagging the S&P 500 by two to three percent. In neutral markets (defined as a return on the S&P 500 on an annualized basis between -3% to 3%), the strategy targets a five to seven percent return. And in negative market years (defined as a return on the S&P 500 of -5%) the strategy targets a return of five to seven percent. In extreme down years (defined as a return on the S&P 500 of under -10%), as explained in other threads, could lead to outsized gains.
The impact of not experiencing losses in down market years, while only slightly lagging (if lagging at all) in positive and neutral years, is astronomical over any extended period of time. Utilizing the Anchor strategy over a number of years, particularly if any of those years are bear markets, should lead to the strategy significantly outperforming the markets as a whole, as back-testing has demonstrated. Even in prolonged bull markets, the returns should still be positive and lag negligibly behind. The peace of mind which comes with being fully hedged more than compensates for the potential of slightly underperforming the market as a whole in prolonged bull scenarios.
More details:
https://steadyoptions.com/an/
The bottom line: hedge does cost money, but Anchor strategy aims to reduce the cost significantly. Anchor 5 years CAGR is 10.1% with volatility of only 8.6% - https://steadyoptions.com/performance/
Wim:
So you mean: long spy and a put spread
So you mean: long spy and a put spread
Was the question for me?
Long SPY or ETF's correlated to S&P 500.
Long puts with longer expiration.
Short weekly puts to finance the long term long puts and reduce the cost of the hedge.
Don't those short weekly puts mitigate your insurance while at the same time paying away edge due to the term structure?
No because we sell less short puts than long puts. We sell just enough puts to cover the cost of the long puts on the yearly basis. And if the markets start to go down, then IV of the long puts goes up making them more expensive, and at the same time we get more credit for the short puts.
This is why it makes sense to start implementing the strategy when IV is relatively low, not after it went up and the long puts became more expensive. Get the insurance when everything is still calm, not after the house is already on fire.
Some people doesn't have a clue what black swan is. What you describe is "stack and roll" strategy. History is littered with companies being very cute with "hedging" strategy. If one wants to hedge, just hedge. Trying to make buck out of the hedging strategy results not being effective when one needs the hedge the most.
Metallgesellschaft is the case study in most of the finance courses in MBA, Also Aracuz adopted similar strategy in FX with disaster results.
Metallgesellschaft is the case study in most of the finance courses in MBA, Also Aracuz adopted similar strategy in FX with disaster results.
Well, I think our results speak for themselves.
In case the markets go down, we are fully hedged and can still produce positive results. In case of black swan event, the portfolio will actually see outsized gains because the IV of the long puts will explode, more than compensate for any long holdings losses.
Sure, you can "just hedge". It will cost around 7-10% per year to be fully hedged. So you will underperform the market by 7-10% while waiting for black swan event (that may not happen). Our strategy allows us to lag the market by just 2-3% per year in strong bullish years, while being fully hedged.
Not simulated. Real results. Real trades. Real live portfolio.