Rough week, but looks worse than it is. We are right on the cusp where I would turn this into a covered strangle vs a covered call so let's see what happens on Wednesday when my next call expires. I think we are positioned for a bounce in the short term (santa claus rally will get us back to previous highs), but longer term has turned more ominous so I rather not add exposure right now. We have had a good year overall so let's not do anything crazy. My current position is 1 ES covered call with b/e of 4692. If I were to add, it would probably be a short put at around the 4100 range. Will update if trade happens.
Back on track as I thought. The benchmark is acting strangely, at first I thought it wasn't including dividends, but I manually checked it and it is. The overall global equity/bond markets are surprisingly weak given the overall strength of SPX, but this gives good clues for 2022. We might be having a flat year with good volatility. If I can finish 2022 with a sharpe above 2.5, that would be a success.
Still going through all of the datapoints and catching up on my reading, but I'm turning more bearish for 2022 and 2023. Baseline is for a flat volatile year with 15% swings both ways with a year end 2022 target of +/- 5%. Shorter term, I'm still sanguine and do not expect a big down move. Sold the 4710 put after the Dec AM expiration. Also sold the 4410 put, both expiring the 23rd. Looking back, the 4410 put was premature and will buy it back some time next week unless we have a big down move and it expires ITM. If so, I will go to the monthly timeframe and sell covered calls for those 2 contracts.
We have basically been rangebound for the last half of the year if you are referring to a diversified global portfolio of financial assets. IMO 2022 will be treacherous and the highs will likely be hit early in the year vs later. I'm not bearish per se; I just think we are set for a more volatile and a rangebound type of year for US equities as they follow the broader risk appetite. I have also tried to define in better terms exactly what my goals are and how my strategy can be extrapolated as my goals change. In general terms, all portfolios can be characterized in terms of how long it takes to hit new highs on average and the average returns per year. Of course, this is just a corollary of the efficient frontier of portfolios that you learn in year 1 of any financial portfolio management class, (typically the lower the vol/risk, the quicker the portfolio makes new highs--think of a portfolio of laddered Treasuries vs global equities). For me, the question has always been: Can I come up with an actively managed portfolio that gets as close as possible to getting the best of both worlds? In other words, can I deliver a scalable portfolio that can deliver the 10-20% returns expected by an equities portfolio, but can make new highs as quick as a bonds focused fund? So far, I have been able to deliver thanks to SPX cooperating, but I'm eager to see how my strategy holds up in other types of markets. This also ties into how this type of strategy fits into my life and why I set it up this way, but that's for another post when I have more time.
Western capitalism is a tier-based system like every other society in human existence, but its defining feature is that capital is used as the arbiter that allows people to flow from one tier to the next. At the bottom and middle are those who exchange their time and expertise for money. If accumulated and invested in means of production, they become capital and allow those individuals to ascend to the top tier capitalist class, who are able to derive their entire income without giving up their time on a salaried basis. This is a catch-22 for society as the system requires the majority to be consumers who spend down their would-be capital for goods that instantly depreciate as that spending becomes income for the capitalist class. This is the true inequality as those who do not care for this current consumption can simply invest their way to the top by compounding most of their savings and capital for their lifetime. But most of us, including me, are somewhere in the middle. This strategy is a systematic way of growing my capital, yet allowing me to at least somewhat enjoy some consumption throughout this journey. This is especially useful for us middle-aged folks in the professional class, who has probably accumulated a bunch of liquid assets and are in their 30s and 40s. They are pulled on one hand by an uneasy sense of scarcity, especially if they compare to peers who always seem to have it a little better, and on the other by wanting to slow down and enjoy a more meaningful lifestyle. This conflict tends to grow as social media highlights the inequality that has always been a part of societies and we become even more alienated from a slower tribal lifestyle that our brains have yet to evolve from. This strategy therefore needs to make new highs as quickly as possible yet cannot meander around like most low risk bond funds. It also needs to be scalable and easy to implement as I am still a busy professional juggling work and home life. The enemy market regime of such a mindset is not necessarily a brutal bear market like 2008 or 2001, but rather a long stretch of miasma like the French or Japanese stock market. The solution for me is an option selling strategy to continuously lower the break-even point so that when the portfolio is already breaking even when the underlying market is still in drawdown. By the time the market has gotten back to break-even, the portfolio is in healthy profit. The devil is in the details of course and the best hedge for this strategy is cash assuming the portfolio overall is making enough to cover the inflation drag. If so, that cash can be put to work when markets are down enough where you feel you are getting value. Since I have a macro background, it is easy for me to make that decision. Putting it all together, I still had to ameliorate the risk of a bad drawdown as psychologically, I do not want to withdraw when there are no profits as a buffer. Based on my analysis, I believe that at worst it will take one year to come out of any drawdown short of total market collapse where guns and canned food become a better investment. Thus, I double that to two years and take half of 2 year rolling average of profits, divide that by 24 and withdraw that amount every month starting in beginning of year 3. Any emergency withdrawal will be subtracted from that 2 year average and following withdrawals will therefore be smaller. If at any point that 2 year average is negative, I simply take a longer average until it is positive again with no withdrawals. Essentially we are smoothing 2 years of gains in normal circumstances and withdrawing monthly. I suppose my benchmarks should be passive income etf's that focus either on REITs, preferred stock, dividend stocks, MLPs, BDCs, and other option selling strategies. Once I have a year's worth of performance, I will stack my performance against them and see if it has been worth the hassle. We will use sharpe to determine the winner.
Good week to close out the year. From May 14 to end of the year, returned about 10.5% with a lower volatility than a 50/50 diversified stock/bond portfolio. Like I said previously, 2022 is going to be a much more difficult year to maneuver. I might decide to wait for a spike in vol and write a few longer term puts. Let's see what happens.
Another rough week, but overall still ok. Came into the week thinking business as usual and sold another put when my 4765 put was mostly otm. Got busy with work, came back and saw both deltas were near 1. This time, I decided to ride it out and sold monthly covered calls against them exp third week of Feb. Breakeven is 4710, but next time I think I will attach a stop order on my short puts that's mostly otm if I sell another one to avoid this situation. Risk/reward wise, both approaches end up ok, but psychologically the latter will probably be better suited for me. Holding onto my baseline assessment that we will be volatile but won't end the year down too much if at all. The key variable is how the Fed views inflation. If the economy starts to slow, that hopefully feeds into slowing inflation as well and the Fed gets the green light to re-engage in clamping down that interest rate and print money. Otherwise, we might be in for a rough year if inflation refuses to abate and the Fed goes all the way with tightening. We are all interest rate traders now.