Selling Premium from a Macro Trader's Perspective

T

tnatrader

My background is in Macroeconomics, mostly from a Post-Keynesian perspective, which I use to trade my personal account. My goal is

1. to outperform a balanced portfolio of global stocks, bonds, and global real estate: 33% ACWI, 33% BND, 33% RWO.
2. Keep drawdowns to a minimum. This was my failure for 2018 (had a double digit 4Q drawdown due to my greed and lack of discipline) and this is what I am trying to fix this year.

I trade leveraged etf's, currently UPRO. At all times, I am targeting a certain exposure to an index, typically the SP500. The target exposure (TE) is not strict, but rather a goal to accumulate towards/distribute from slowly. For example, currently I am ~1200 shares under the target and tomorrow I will sell at least 3 ATM puts expiring this Friday.

Even though I'm below my TE, I will continue to sell ATM calls if the markets continue to rally. This is simply because I am willing to give up some upside for steady gains. If I ever find myself short if my calls are assigned, I will simply buy shares instead of further selling puts. I get this may seem a convoluted way to do things as CSP and covered calls are the same thing, but IB do not charge for assignment and I find it a logical way to think through my portfolio.

My current portfolio:

Long Equity

400 UPRO @ 46.84

Short Options

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My short term outlook (1-2 weeks) is neutral to bearish. Put-call ratio is near its lower bound and the China - US Trade Deal seems like a perfect sell the news event. However, because I am so far below my TE, I don't mind selling some puts here. My exposure level also increases as the S&P goes lower (currently 48% of SPX), assuming my long term fundamentals don't change so we have plenty of liquidity to work with.

My longer term (3-6 months) outlook is neutral. Worst case scenario, we roundtrip to Dec/Jan lows, in which my TE would increase to ~85% of SPX. Assuming the fundamentals stay the same--no recession, mild slowdown at worst--I would be well positioned with enough cash to accumulate all the way down.

Once my trades close, I will add them as a running tally to subsequent posts.
 

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I'm sure you know what you are doing and you have thoroughly backtested your method? Those geared ETFs can really move. I wouldn't short anything on those bast*#ds (I know, you are long shares, but still...). Good trading. :)
 
Option_Attack said:
I'm sure you know what you are doing and you have thoroughly backtested your method? Those geared ETFs can really move. I wouldn't short anything on those bast*#ds (I know, you are long shares, but still...). Good trading. :)
More...


Thanks for the reply! My thinking has always been that there's no intrinsically risky trade or ticker symbol. It's almost always the position sizing that makes it so. The embedded leverage on these 3x etf's just means I can use 1/3 the position sizing to capture the same return.

Currently, my total position represent ~20% exposure to SPX (rest of portfolio is cash) and because my overarching macro thesis is that there's no recession, I am comfortable buying an up to 20% dip in SPX.
 
Yes definitely keep it sane wrt position size. I got burned badly by some leveraged ETFs, but it was about 10 years ago. Learned my lesson!
 
Sold a few more ATM puts today. Because of my longer timeframe, I view this as an opportunity to start accumulating shares, even though I do think the correction has further to go. This is not mechanically averaging down, but rather acting out my overarching thesis of a pullback of an unknown magnitude in an intermediate bullish environment. I will be selling more puts tomorrow as my TE is around 50% SPX exposure.

I now have a ~30% exposure to SPX.

Current Portfolio

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As expected, the market has continued to correct. I sold 2 more puts while my target exposure (TE) to SPX has crept up to 55%. My actual exposure is 31%. I expect to sell more puts tomorrow to slowly close the difference with my TE.

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Sold 2 more puts expiring next Friday. All of my puts will be assigned tomorrow while all of my calls will expire. This is what my portfolio will look like after assignment tomorrow. Thesis remains the same so I will continue to accumulate shares by selling ATM puts. My current exposure remains ~33% of SPX.

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Nice rally today, but overall thesis hasn't changed. Sold 4 calls and 2 puts, updated spreadsheets to make more information available. I would love to hear from detractors to see if I am missing anything from this strategy. It's essentially the wheel strategy where position sizing determines whether I am profitable.

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I sold 8 47 calls and 1 47 put expiring this Friday. Looking to sell another ~6 calls tomorrow as long as UPRO stays above 46.5. Will sell a couple more puts tomorrow regardless.

Thesis remains on course: we are in a volatile period of a few weeks to a month, but looking ahead 3-6 months, there should be no recession and thus stocks have a natural floor around their Dec lows.

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