Anyways, as far as I am concerned, I invest following 1/N (portfolio theory can eat a bag of d!cks), each position is initially 5K and I hold forever.
In like 3 years since I started buying single stocks, I must have sold only twice. Once the stock got delisted, the other time the PE was approaching 30 on a consumer goods comp. So I was getting a little uncomfortable.
Oh it happened, I’ve been following this general rule for 10 years now.
Yes, I do layer derivatives and smaller short-term trades (like vol) on top of the main portfolio. But the main underlying positions follow concentration. It’s straight out of CFA L2, I actually agreed with the books on this point.
I do something similar. Concentrated value equity portfolio and an options overlay that captures excess implied volatility.
Edit: Good read – Blackrock: VIX Your Portfolio …this should refute most people’s hesitation about selling listed equity options
^ Yup, I keep shorting vol despite people telling me I can’t, and it keeps boosting return. Have a 5% VXX short that has been decaying away for months. It just requires some risk modeling abilities. BR assumes a 72% drawdown in their model, but I assume 250%.
“A fairly safe assumption is that the spot VIX index could rise to roughly 100 from a starting point of around 20. For a one-month variance swap sized at –30 basis points of vega notional per unit of capital, this would imply a drawdown of 72%. For a VIX futures position sized at –90 basis points of vega notional per unit of portfolio capital, a move from 20 to 100 for spot VIX would imply a drawdown of at most 72%, because the VIX futures price is unlikely to go as high as spot VIX.”
Check out: https://sixfigureinvesting.com/blog/ (cheesy blog url, I know but…) really like the author’s writing. Discusses a lot of the newer ETF/ETN vol products that have come to market in the last couple of years.
It’s impressive that with respect to long-term US equity index allocations, since 1990 for instance you would have been better off today from a total return and risk-adjusted return basis had you sold an at-the-money put contract on the S&P 500 (fully collateralized with the cash) systematically on a monthly basis as opposed to owning the S&P 500 TR (dividends included) outright over the same horizon.
It would be if that were true, except it’s not.
What part of what I wrote wasn’t true? Take a look at the total return since 1990 on the S&P 500, take a look at the sharpe ratio. Now take a look at the CBOE PutWrite over the same horizon. If you think otherwise, show me the data.
What is most interesting to me is that systematic strategies like put selling, or call buying, or whatever combination of some of those, seem to produce returns that are very similar to just buying the stock index itself. Sure, some will be historically better or worse than others, but they are still within a comparable range. So one could say that these derivative strategies mostly just reflect the risk premium in the market. Of course, the benefit of using derivatives is that you can magnify your returns through leverage, which might be something you want to do if you have a long time horizon.
Regarding short volatility positions like SVXY, one should be aware that they are more like leveraged beta strategies, and shouldn’t have better risk adjusted returns that SPX overall. SVXY will have severe drawdowns when implied volatility spikes; it will recover eventually, but at the cost of precious time, which is the most valuable resource you have in investing.
Products like SVXY, XIV, etc. would be great for tactical volatility plays I suppose, but I don’t know if they can work in a passive strategic allocation setting due to the significant drawdown potential… unless at very, very small portfolio weights. But even for the tactical stuff, in many instances I figure you may just be better off trading the volatility futures themselves which are likely to be an easier position to get in/out of. A lot of these newer products are highly illiquid with fairly wide bid-ask spreads (except for maybe SVXY and XIV) from what I’ve seen.
You would not be better off on a total return perspective and the perceived sharpe improvement of PUT over SPTR is not real. The data is freely available on the CBOE site and extends to current day as opposed to the BlackRock paper that ends in 2012.
The touted comparisons use pure buy/hold price index comparisons. These show similar total return (perhaps slight edge to PUT) with PUT showing less volatility. Given any reasonable rebalancing frequency (i.e. yearly - nobody invests $100 and lets it sit for 30yrs) this disappears and the SPTR usually outperforms at the expense of added volatility.
These points are all moot though. When you account for taxes (which you must given PUT is a monthly strategy) the volatility of both strategies is equal and the SPTR provides a higher return. We’re also ignoring investability and assuming anyone could trade options in 1990.
…to be clear. An investor would be much better off investing in the SPTR and incurring long term capital gains compared to trading a monthly put selling strategy that incurs short term capital gains. This is both on a total return and risk adjusted basis.
I could write pages about VIX products, but one thing you should understand about buying SVXY or XIV is that you are selling a portfolio of downside puts with proportionality equal to 1/strike^2. VIX is actually a measure of variance, not standard deviation. So you are selling both volatility skew and convexity. This means, yes, that in a downturn, your loss can be severe and will take many periods of future gains to recover. Would you sell many put options in your equity portfolio to enhance your gains? Maybe - but you should understand that this is what inverse VIX products do essentially.
Fair points made and taken. Admittedly, I hadn’t factored in the tax considerations. It’d be an interesting exercise to look at the return on an after-tax basis. One thing working (slightly) in the PUT’s favor is that cash-settled equity index options (like the S&P 500 index options) are recognized as an IRS 1256 contract where all gains are taxed 60% long-term CG, 40% short-term.
Agreed that systematic short exposure to expected variance (whether outright or indirectly by selling equity index options) results in acquiring a return distribution that has significant (negative) skew, excess kurtosis, and convexity with respect to equity indexes… I wonder, however, if these positions were made not systematic, but conditional on volatility being at relatively high levels whether the skew or convexity would be meaningfully different. E.g., only selling, say, VIX front-month futures when VIX > 40 and holding to the expiration date. While VIX can certainly go to 80 from there, the retracement from 40 to a more normal range between 15-20 should add some positive skew in your returns compared to having systematic short exposure at an avg. futures price in the mid teens.
I just wait for vol to go up, then I short it, easy peasy. 
Many people try to construct strategies like this, and there are a wide variation of outcomes. It is not easy to produce the correct price signals - if you could, you might as well apply that to index futures or other products. And don’t forget that magnified volatility also magnifies vol of vol, so it is questionable if your assumed mean reversion will justify the additional leverage you would be putting on - don’t forget that a further negative move on a short vol position will generally offset a proportional positive move. In general, you would probably make money from selling implied volatility, but as stated earlier, whether this exceeds normal equity risk premium on a risk adjusted basis remains to be proven.
Are any of you short SVXY, regardless of strategy employed?
Where then in your opinion does volatility “as an asset class” (whether long or short) fit in the context of a portfolio?
I have a feeling you’ve read of some of Chris Cole’s stuff (Artemis Capital)?
I’m not. I passively hold XIVH as a small percentage of my Roth (another inverse volatility product that has a long hedge component built in).
I assume the guy above means long VXY not short SVXY. I think it can be useful as a hedge. As I alluded to before, it just means you buy a whole stream of options, biased towards downside strikes. It’s most likely a bit too much for most people though - not only are you buying downside, but you are buying atm and upside as well. I don’t think this is common among most investors.
“Vol as an asset class”, to me tends to be just another way to express a directional view on the overall stock market. However, it might still be useful to use options if you are concerned about frequency and timing of returns. For instance, you might care about frequency of drawdowns and volatility of returns, not just long term returns. Also, obviously, it is much easier to attain great leverage with vol returns than with stock returns.