The story so far…
Just about a year ago, the market had a significant downturn and I closed out of all of my positions at a loss using my trade rules as a guide. I took a bit of a break from active trading and decided to go mostly long using some ETFs. Shortly thereafter, my employer instituted some new rules related to employee trading and personal investing. I work in the financial services industry and this sort of policy is fairly common so as to help remove any potential conflicts of interest or the perception of conflicts of interest. I also had some other things going on in my life that were more important to me than active trading and I had pretty much taken a set-it-and-forget-it attitude.
A couple of months ago I started to get that itch again and was looking for a way to get back into it using options in my trading but with a lighter touch. I needed less activity and simpler rules and I wanted it to work on a smaller account. As a result, I put together a new strategy that has a core position that is long the market using ETF options. I also have a short term hedge in the form of weekly butterflies built using SPX options. I also have a longer term butterfly (about 75 days or so) that I will use as a medium term hedge / theta producing trade depending on which way the market is going. I am thinking about adding another hedge in the form of a long option that I will roll out every few months but that is not part of my current position. This is the strategy I will be detailing in my weekly posts at the end of each week.
I’ll measure performance the same way as before: Portfolio vs SPX. Also like before, I will be including the contribution to return that each piece of the portfolio is adding to or subtracting from the overall portfolio return. Finally, I want to include something new: upside and downside statistics. The portfolio is long but I am trying to manage it in such a way so that I capture more of the return of the market when it goes up than when it goes down. As a result I am planning to include stats such as upside capture ratio and downside capture ratio that detail how the portfolio behaves in up markets and down markets. It’s a little early for spring training but batting average will explain how often the portfolio return is greater than or equal to the index return. I plan to present the results using weekly return observations for the past week, 4 weeks, 12 weeks and inception to date.
The portfolio is already built and I will start tracking performance next week. Here we go!