The End of the Year
Vol #19- December 18th, 2020
The end of the year is now upon us, and 2021 will begin in only two short weeks.
We’d like to take this opportunity to say thank you to all of our clients and supporters. Over the course of the last three and a half months, we’ve been working hard to build a product that delivers options strategies for everyone.
It has been a tremendous learning experience as we listen to the feedback, and adjust our offerings to fit with your investment needs. Tailoring a product to deliver the “little bit of different” to your portfolios has been eye opening.
We’re excited for what 2021 will bring. We have big plans for new features, opportunities, and partnerships. We’ll be expanding our offerings beyond Model Portfolios, and looking to deliver increasingly bespoke products for investors.
As we look towards the markets, this is the time of year that investment managers often come with predictions about what will happen next. While I don’t like the idea of picking price targets, I do think there are some trends we can expect to continue, and I was on NASDAQ’s “Trade Talks” series earlier this week discussing these.
Options will continue to boom. We have seen amazing growth in this space - OCC volumes are up 70% YOY and only increasing through the final months. It’s wonderful to see so many new investors discovering the power of these tools, and we look forward to building on that.
Other trends such as the resilience of passive investing, and the buy the dip, dollar cost average investors have been vindicated this year despite the choppiness of the markets. It has bolstered the resilience of the low fee diversified exposure method of investing. Even the 60/40 portfolio returned 13% this year, despite all the criticism.
We’re also keeping an eye on the larger flows from different investment sectors. Market action could bring back both structural volatility sellers, and cause risk parity funds to rebalance. To the extent that these self-reinforcing flows persist, the market does have some tailwinds behind it.
Enjoy a safe and festive holiday season, and we’ll see you next year!
Thanks for joining us,
Mark Phillips
CEO
Happy Friday!
As we approach the holidays, there’s one fun options strategy to think about here, the Christmas tree.
The strategy gets its name because the p&l graph looks somewhat staggered, and almost like a Christmas tree.
A Christmas tree is a strategy that has a neutral to slightly bullish bias, and can be thought of as buying a call spread, versus selling two call spreads slightly higher. Much like a butterfly, we want the stock to land right where our “short strike” is, but we have given it a bias by shifting it up a few strikes.
We start by buying one call near the money. Then skipping a strike, we sell three calls. (One of these creates the long call spread, and the other two are the short leg of our second call spread.) We then complete the trade, and close our second call spread by buying two more calls on the next strike up.
The bias of having two short call spreads, means that the overall cost of the strategy is cheaper, but if the stock does go through the upside strike, the pnl line goes down more steeply.
The strategy has a defined risk characteristic that lets the investor know exactly what their loss potential is. It’s best used when you have a moderately bullish take on a stock, and want to enter into that trade for as low of a debit as possible. You’ll also be short volatility, so as the market drifts up your spread will also come in.
Happy Trading!