![]() ![]() 5% budget to at-purchase 7.5% out-of-the-money call options.5% budget to purchase 2.5% out-of-the-money call options.2% budget to purchase at-the-money call.The strategy is governed by the following rules: ![]() The Nasdaq-100 Upside Convexity Strategy allocates a defined budget as a percentage of the historical hypothetical portfolio value to purchase 3-month NDX call options at each roll date. Investors could preserve gains and employ active management to the Upside Convexity Strategy by monetizing call options when the Nasdaq-100 has risen significantly in a short period of time.The Nasdaq-100 Upside Convexity Strategy outperformed the Nasdaq-100 during the COVID-induced correction by roughly 980 basis point falling 18.2% versus the Nasdaq-100 falling 28%.The Upside Convexity strategy has had significantly higher performance since January 2018 (21.3% annualized returns versus the ATM Call Buying Strategy’s 1%) and illustrates the benefits of spending a small portion of the budget to purchase out-of-the-money calls.The Upside Convexity Strategy had a max drawdown of 30.2% during financial crisis versus the Nasdaq-100 falling 53.4%. The Nasdaq-100 Upside Convexity Strategy has shown strong performance with the model portfolio having 4% annualized returns since January of 2007.The Upside Convexity strategy significantly reduced Max Drawdowns versus the long-only strategy during the COVID-induced correction.Since January 2018, the Upside Convexity strategy has high performance with strong periods of outperformance against both the long-only strategy and an at-the-money call buying strategy during sharp market rises.While performance of the Nasdaq-100 Upside Convexity Strategy has lagged the long-only Nasdaq-100 strategy since January 2007, it had a significantly lower Max Drawdown during the Financial Crisis.The Nasdaq-100 Upside Convexity Strategy was designed using Volos’ Strategy Engine – a no-code web application that allows investors to develop and analyze custom single and multi-leg options.Using a budgeted approach to buy calls on the Nasdaq-100 can often prove more efficient than a long only strategy in rising markets.Systematic Call Buying for Upside Convexity: With the Fed dot plot now showing continuous rate hikes in the coming years and indicating they could be more aggressive than they have previously indicated, we wonder whether the 40-year bond bull market is ending and could precipitate what investors have deemed “The Great Rotation” – an exodus of assets out of fixed income and into equities.There will ultimately be winners and losers as this dynamic plays out over time. The ramifications of pent-up demand following the economy reopening after multiple years of a stay-at-home lifestyle are difficult to quantify and should be considered as offsetting some of the effects of rising prices. ![]()
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