Navigating Volatility - Risk-Controlled Portfolio

Controlling portfolio beta, which measures overall systemic risk of a portfolio compared to the market, on the whole, is essential as these markets continue to display bouts of extreme volatility. Containing volatility while generating superior returns relative to the market is the goal with an options-based portfolio. Mitigating risk within a portfolio can be achieved via a blended options-based approach where cash is held in conjunction with stock positions and an options component. Options alone cannot be the sole driver of portfolio appreciation; however, options can play a critical component in the overall portfolio construction to control risk and volatility.

Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing returns is the core of the options-based portfolio strategy. Options can enable smooth and consistent portfolio appreciation without guessing which way the market will move. Options allow one to generate consistent monthly income in a high probability manner in various market scenarios. Over the past 24 months (April 2020 – March 2022), 419 trades were placed and closed. An options win rate of 97% was achieved with an average ROI per trade of 4.4% and an overall option premium capture of 50% while outperforming the Dow Jones throughout these two years. The performance of an options-based portfolio demonstrates the durability and resiliency of options trading to drive portfolio results with substantially less risk. The options-based approach attempts to circumvent market drawdowns and generated a return of 62.2% relative to the Dow Jones’ 58.2% (Figures 1, 2, and 3).

Controlling Volatility
Figure 1 – Overall option metrics from May 2020 to March 2022 available via a Trade notification service
Continue reading "Navigating Volatility - Risk-Controlled Portfolio"

Options-Based Portfolio Screening Tool

Controlling the overall systemic risk of a portfolio is essential as the markets continue to grapple with inflation, a rising interest rate environment, supply chain challenges, and the Russian/Ukraine conflict.

Controlling volatility while generating in-line or superior returns relative to the market is the goal of an options-based portfolio. An option-based strategy is achieved via a blended approach of options, long stock positions, and cash. Options alone cannot be the sole driver of portfolio appreciation; however, they can play a critical component in the overall portfolio construction while keeping volatility in check (Figure 1).

Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing returns is the core of an options-based portfolio strategy. They can enable smooth and consistent portfolio appreciation without guessing which way the market will move. Options enable the possibility to generate consistent monthly income in a high probability manner in various market scenarios. An options-based portfolio provides durability and resiliency to drive portfolio results with substantially less risk. Over the previous 2-year period, the portfolio strategy has consistently outperformed the Dow Jones with reduced volatility (Figure 1).

Options Trading

Figure 1 – Previous 24-month period of overall returns for the options-based portfolio strategy relative to the Dow Jones. All option and stock trades executed in the options-based portfolio is available via the Trade Notification Service

Options Screening Tool

Using basic technical indicators and key dates can aid in trade type selection, such as covered calls, put spreads, call spreads, or iron condors (Figures 2 and 3). Continue reading "Options-Based Portfolio Screening Tool"

Disney - Full Business Strength Ahead

Disney is starting to fire on all cylinders now that Covid has subsided. Disney's parks are back in full swing, and movie theaters are springing back to life in this post-pandemic environment. Despite Disney's full business nearly back online, the stock sits near a 52-week low. Disney (DIS) should be in the sweet spot of capitalizing on the pent-up post-pandemic consumer wave of travel and spending at its parks while being the new and preferred content provider via Disney Plus. The former is roaring back while the latter continues to build out content and expand its membership base.

The streaming efforts (Disney Plus, ESPN, and Hulu) have transformed Disney's business model with recurring revenue streams, which will be further bolstered by its legacy businesses now that Covid is diminishing. Taken together, Disney has set itself up to benefit across the board with its streaming initiatives firing on all cylinders while its theme parks are back online and movie theaters have reopened. The company has been posting phenomenal streaming numbers that have negated the negative pandemic impact on its theme parks. However, the streaming-centric narrative is changing as the theme park revenue flows into the company's earnings. Disney presents a very compelling buy for long-term investors as the synergy of its legacy business segments combines with its wildly successful streaming initiatives, all of which have more pricing power down the road to expand margins.

“Hulk Smash” Earnings

Bank of America analyst Jessica Reif Ehrlich noted that the most recent quarterly results were "Hulk smash" and largely driven by Disney+ direct-to-consumer segment, as well as "significantly better" results from its parks, experience, and products business, which generated $2.45 billion, compared to estimates of $1.35 billion. Continue reading "Disney - Full Business Strength Ahead"

Potential Market Inflection Point Imminent?

Cautiously Optimistic

Commodity prices are soaring, the war between Russia and Ukraine is worsening, inflation is raging, and the Federal Reserve has begun increasing rates. The backdrop seems ominous; however, the market may be just one positive headline away from an inflection point to turn the tide in a positive direction.

Timing the market has been proven time and time again to be nearly impossible; however, what is possible is capitalizing during these correction periods and buying heavily discounted stocks. These correction periods are great opportunities for long-term investors via dollar cost averaging throughout these long stretches of suppressed conditions. As the best market days typically follow the worst market days, building stock positions and riding out the volatility has proven advantageous. Missing out on just a few of the best-performing days of the market in any given year can drastically alter investor returns and yield dramatically inferior results.

The Russian/Ukraine War

Conditions between Russia and Ukraine continue to worsen while the west slaps sanction after sanction on Russia for its aggression. However, per Bank of America, stock declines related to the conflict may have bottomed. Continue reading "Potential Market Inflection Point Imminent?"

Big Banks' Meltdown Overblown

Higher Expenses and Geopolitics

Capping off 2021, the cohort of big banks had the perfect set-up with secular trends via a confluence of a rising interest rate environment, post-pandemic economic rebound, financially strong balance sheets to support expanded buybacks and dividends, a robust housing market, and the easy passage of annual stress tests. However, as earnings season kicked off in January 2022, investors saw a step-up in expenses, specifically wage inflation. Bank of America (BAC), JPMorgan Chase (JPM), Morgan Stanley (MS), Wells Forgo (WFC), and Goldman Sachs (GS) all reported very strong quarters; however, investors couldn't look past the increasing expenses and these stocks sold-off as a result.

To exacerbate the sell-off across the financials, the geopolitical backdrop with the Russian/Ukraine conflict paved the way for a second leg down. This one-two punch resulted in BAC, JPM, and GS selling off 18.3%, 22.3%, and 22.6%, respectively, from their 52-week highs through the first week of March. However, as Jerome Powell sets the stage for an economic "soft landing" with the clear commitment of raising interest rates by 25-basis points and the geopolitical headwinds inevitably abating, the big banking cohort looks appealing at these levels.

Big Banks

Immaterial Geopolitical Exposure

The big banking cohort has minimal to no direct exposure to Russia; thus, the second leg down in this space is not tied directly to the geopolitical conflict. This is especially important as the geopolitical tensions rage on and possibly snap up these stocks as a function of overall market sentiment. Overall, the big banks generate an inconsequential amount of revenue from Russia, per Bank of America's analysis of regulatory 10-K filings. Continue reading "Big Banks' Meltdown Overblown"