• A portfolio allocated to equities and bonds has done exceptionally well for the better part of 3 decades.
• Since 1982, the bond bull market has created an environment where a traditional stock/bond portfolio has benefitted from both:
Negative stock/bond correlation, which provided a diversifying effect during equity market volatility.
Bonds not only provided a diversifying effect to the portfolio, they also made you money.
• As money pours into options selling strategies, suppressing the VRP, buying options has become inexpensive.
• Long options have defined risk and positive convexity (Gamma).
• An uncapped long option strategy eliminates tail risk on both sides.
Things you insure… Things you don’t insure… Home Car Your life Life savings Health
9 An exchange-traded put cannot flip when the market crashes.
As the Market Drops
Long Puts Rise
Mathematically defined protection.
(more reliable than traditional diversification) An exchange-traded call will increase in value when the market rises.
As the Market Rises
Long Calls Rise
Mathematically defined market exposure.
(less risk than holding the underlying) Hedging is too Expensive Especially in High Vol Markets
20% Annualized Lower Strike Options have Higher Implied Volatility
Vertical Skew
Lower Strike Options are overpriced Vertical Skew
Over-Priced -110
+100 NO !! NOT GOOD
Negative Gamma Exit Trade Sell (2) Options
Positive Gamma
Buy (1) Option
Delta Neutral Restrike Trade Exit Delta Neutral 100/125
$50,000 premium 100 pts Gap Risk 17 Bpt/Spot -125 Exit The Trade Max Profit or Re-Strike
Width of Spread will determine Cost to Max Profit
$180,000
Tenor 31 Day +100 63 Bpt/Spot Max Value -15 Delta $945,000
Tenor 30 day
100/125
$97,000 Premium -25 Delta 34 Bpt/Spot
VIX Banding
When Volatility is High we want to own movement
When Volatility is Low we want to reduce carry cost Stock vs Deep-in-the-Money Calls
SPY
Deep-in-the-Money Call (6 Month 85 Delta) Stock Replacement Extended Bull Market or Rising Volatility
Long Dated Deep-in-the-Money Call = 6 Month 85 Delta
Defined Risk
SPY SPY Calls Shares position 2975 2975.98 # Shares/contracts 2975 35 Price/share 277.71 $3710 Investment $826,187.30 $129,850 Cost per day Zero 87.66 As Markets Become More Volatile
VIX Banding As Volatility Rises Spot VIX moves through different levels (move from stock > deep in the money > call back spreads)
What is a Call Back Spread ?
Long Two Shorter Dated Calls =(30 Day 45 Delta) Short One Longer Dated Call =(60 Day 60 Delta)
Synthetic Position credit
Adjustments : Moves 5 deltas or 5 days > Rebalance Call Back Spread Credit
Risk
Defined Risk Deep-in-the-money Long Calls have considerably more risk than a Call Back spread
29
SPY SPY Calls Call Back Spread Shares position SPY 2975 SPY Calls 2975 2949 Shares position# Shares/contracts2975 2975 2975.98 35 +200/-100 # Shares/contractsPrice/share 2975 277.71 35 $3710 +1.4 Price/shareInvestment 277.71-$826,187.30$3710 -$129,850 +14,050 InvestmentCost per day$826,187.30 Zero $129,850 $87.66 $633 Cost per day Zero 87.66 Call back spreads clearly outperform Deep-in-the-money calls in a down & up move
Jan 2014 –Jan 2018 IPSAX is not only designed to protect against significant down moves (the left tail).
In extreme uptrends, like we saw in 2017 thru early 2018, the fund is able to participate in significant portions of the upside.
We do not sell upside calls to finance protection.
Carry/Day (Theta) Time Cost
19 cents/day $12 Buy Long Term cost 144 days Underpriced
60 cents/day 9 days $3 Buy Short Term cost
Overpriced
1 short-short dated Put can finance 3 long-long dated Puts
Buy long term sell short term
IPS Bear Strategy Jan 2015 – March 2020
60/40 Stock Bond Mix
80/20 SPY VIX Mix
SMA Actual Performance
Portfolio Diversification Using Vix Options
Contango
UX4 UX3 25 bpt 25 bpt UX2 25 bpt
UX1 25 bpt
This strategy has a terminal cost of 3% per Year
Month 1 2 3 4 Backwardation
25 bpt
25 bpt 25 bpt High Vol 25 bpt
25 bpt 25 bpt 25 bpt
25 bpt Contango
SPX +VIX Ladder 3% annual cost
Vix > 18 Put Back-Spread Short Delta 25 Long Delta 15 DTE 30 Roll Rule : 10 Days Short Delta > 40 Long Delta < 10
25 Delta 5 Days Roll Sell (1) Options 15 Delta
Buy (2) Put Options Tail Hedge Put Back Spread
$900,000
15 Delta .90 cents X 1000/1500 contracts = $90,000 10 pts
36 Delta Net Cost = $1 $100,000 premium for 1000 contracts
The performance data shown in this presentation represents past performance data. With any investment, past performance is not necessarily indicative of future performance. This presentation should not be misconstrued as an offer to buy or a solicitation to sell any securities. The Absolute Return Strategy performance is representative of a size-weighted composite of the accounts managed by the firm classified as the Absolute Return Strategy-Moderate composite. The returns represent net returns of clients invested into the strategy, accounting for the 1% annual management fee. Please note that all performance in 2011 represents one non- fee-paying account comprised of the firm’s capital. Due to the nature of composite performance, it cannot be guaranteed that an investor in a specific composite will receive the same gains as the size-weighted average of the composite. As of April of 2016, the separately managed accounts in the ARS – Moderate composite gain their exposure to the ARS through a 40 Act fund that utilizes the Absolute Return Strategy. The performance of the ARS shown on this sheet still represents the size- weighted average of the SMA’s that are part of the ARS-Moderate.
The Absolute Return Strategy invests in derivatives securities. Specifically, the fund sells and buys put and call options and sometimes utilizes leverage; these factors can cause portfolios invested in the strategy to show greater fluctuations than investments in the underlying assets. Prior to buying or selling an option, investors must read a copy of the Characteristics & Risks of Standardized Options. Put options give the purchaser the right, not the obligation, to sell a specified number of shares of the underlying security at a specific date in the future. The seller of a put option has the obligation, not the right, to have a number of shares delivered to them at a specified price at a specified date in the future in exchange for receiving a premium upfront for this risk. The seller of a call option has the obligation, not the right, to deliver a specified number of shares to the buyer at a specified price at a specified date in the future in exchange for receiving a premium upfront for this risk. The risk of buying either a put or call option is limited to the premium paid for said option.
The performance of the SPY represents the SPRD S&P 500 ETF Trust and includes management fees and dividends. The performance of the AGG represents the iShares Core U.S. Aggregate Bond ETF and includes management fees and dividends. The performance of the S&P 500 Price Return (SPX) represents the performance of the S&P 500 without dividends. The performance of the Bloomberg Barclays US Agg Total Return Value Unhedged USD Index represents the security LBUSTRUU Index in the Bloomberg Professional software and includes reinvestment of dividends.
$100,000 Premium