Playing the Short Side on SPX
It’s been officially two years since I’ve started my algorithmic investing/trading journey approach and I’ve definitely learned a lot so far. After running another portfolio review, I’m simplifying things again into things that work and things that didn’t work for me. I’ve dabbled in holding dividend aristocrat names, however, the idiosyncratic risk is just too much for me to handle so I’ve decided to steer away from that direction. However, dividends as a whole is still a very effective source of income for any portfolio, the trick is to identify a method that minimizes your exposure to the actual underlying stock’s fundamentals. Overall, I’m distilling my portfolio strategies down to the following five pillars:
- Selling Put premium on the SPX index
- This is so far my bread and butter; it has done consistently well with minimal volatility. Obviously the current financial climate has been allowing this to happen, but during a regime change, the difference would be how far out the money and how long of a maturity I’m willing to hold.
- Currently my hypothesis is:
- Short closer OTM short-dated Puts, e.g., under 5 days to expiry when VIX <= 15
- Short farther OTM medium-dated Put Spreads, e.g., two weeks to a month to expiry when 15 < VIX <= 20
- Short far OTM long-dated Put Spreads, e.g., a month to three months to expiry when VIX > 20
- Shorting Volatility ETFs such as VXX or buying XIV based on my normalized ratio
- This the most volatile of my pillars and needs constant management right now until I have a new automated code working in Quantconnect
- This is also the area for the largest amount of capital gains as the backtested returns for this strategy has beaten all others in my repertoire
- Holding some beta in the form of SPY and PFF shares for capital gain and dividends
- Longing some actual shares of SPY and PFF allow me to capture a bit more beta when the trend is upwards
- Simple SMA logic should be implemented along with looking at the following macroeconomic indicators:
- Civilian Unemployment Rate (flag if over 5%)
- 10 year to 3 month Treasury Spread (flag if over 2%)
- National Financial Conditions Leverage Subindex (flag if over 1)
- Real Retail Services growth
- Industrial Production: Consumer Goods
- Capturing Earnings volatility premium on single name stocks the day before earnings release
- Every week, determine the companies reporting earnings for the week and sell the nearest expiring put 15 minutes before the close of the previous day.
- Filters for the single name companies will be along the lines of:
- Must have weekly options
- The stock must have a positive skew in its weekly return volatility distribution
- The stock must not have had any major downside volatility in the last 100 days prior to the earnings week
- Dividend capture with covered calls on single name and ETFS
- This is currently the hardest to capture, but it should be along the lines of determining which stocks or ETFs will have a ex-dividend date coming up within the next 2 weeks and similar to earnings, a covered call will be set up around 10 days before the ex-date so that the extrinsic value of the ITM call contract is roughly equal to the amount of the dividend.
- The only concern is minimizing the idiosyncratic risk of holding such a position on a single name for two weeks.
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