It's time for another thread on everyone's (just me?) favorite subject: rebalance timing luck!
This time, with options.
2/ All the hard work here was done by @sbraun27, who is a brilliant analyst and you should follow him.
3/ For the uninitiated, "rebalancing timing luck" is performance differential that occurs due simply to *when* scheduled rebalances occur.
I won't go into it more than that. Google the term. I've written a nauseating amount about it.
4/ Okay, here's the setup: it's the S&P 500 + puts.
More specifically, we hold the S&P 500 and every 6 months we rebalance, selling whatever puts we hold and spending 2% of our portfolio on new 11-month, 10% OTM SPY puts.
5/ Because we're rebalancing every 6 months, there's actually 6 potential monthly variations we could construct:
- JAN / JUL
- FEB / AUG
- MAR / SEPT
- APR / OCT
- MAY / NOV
- JUN / DEC
6/ And so we do. And here's their yearly returns.
Note that the spread between best and worst performing variations peaks over 700bp... for a teeny, tiny 2% put position!
7/ I think this all gets a lot more "obvious" if you look at what happens in March 2020.
8/ Basically, the FEB/AUG portfolio does well because it had most recently rebalanced, so it's strike was closest, whereas the APR/OCT portfolio hadn't rebalanced in 4+ months and price had moved far from its strike.
The drawdown difference is -20% vs -27%.
9/ If we just look at relative performance of the models vs SPY, we can see the same general trends, but some meaningful discrepancies during different events.
e.g. APR/OCT does much more poorly in 2008 than JUN/DEC.
10/ As per usual, I'd argue that if you don't have an active view as to when you should rebalance, then you should diversify your rebalances.
Here, you could just create a ladder. Each month you'd sell the 5-month puts and spend 0.33% on the 11-month.
11/ TL; DR:
High Convexity + Rebalance Timing Luck = 💣
FIN.
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2/ The expectation of low real returns going forward puts a significant burden on long-term investors striving to meet future needs.
e.g. Endowments who are making annual withdrawals, pensions that have future liabilities, and individuals who are saving for retirement.
3/ A phenomenon that we've witnessed over the last decade is investors moving up the risk curve by either (1) increasing equity exposure, (2) increasing credit risk (lower quality bonds), or (3) increasing liquidity risk (e.g. real estate, private equity or private credit).
1️⃣ Some funds achieve capital efficiency in a tax efficient manner, and some do not.
e.g. $PSLDX buys bonds and overlays with S&P 500 futures. That's very tax inefficient, since those S&P 500 futures are taxed at a 60% long-term / 40% short-term rate.
NTSX, on the other hand, buys the S&P 500 and then overlays with U.S. Treasury futures. Those futures are also taxed at the 60/40 rate, which *can* be more tax advantageous than buy-and-hold bond exposure, where the majority of the return (yield) gets taxed at ordinary income.
I put $1 in $USDC.
You start a new project $COIN.
I buy 1 $COIN for 1 $USDC.
Someone else starts $TOKEN.
I buy 1 $TOKEN for 1 $COIN.
How much money is in crypto?
@John_Stepek So you’ve got a massive ball of “money” that bubbles up, but can’t ever really be removed. So it just rips around the space.
It’s L1 tokens one month, DeFi the next, NFTs the next...
@John_Stepek So unless (1) people can start to borrow fiat against their crypto / NFTs, (2) people try to move crypto into fiat en masse, or (3) businesses accept crypto as payment, I think you just get this risk of inflated bubble money.
I interpret @GestaltU’s point as reflexive: if everyone prepares for the last crash, then it’s almost impossible for a crash like it to occur!
@vixologist@AttainCap2@GestaltU I don’t disagree with either of those points. Adam’s point is one of the reasons that many on here – myself included – were saying that it would be hard to see a post-election crash last November.
@vixologist@AttainCap2@GestaltU I still think a lot of the same dynamics permeate the system (namely, excessive risk taken driven by low interest rates; adoption of systematic strategies; influence of options on underlying) – but the build up of risk that 🍋 alludes to may be gone for some time.
1/ Back in 2001, I used to play this game called Runescape (runescape.com)
(Which is still very much around, but looks nothing like it did when I played.)
2/ There was a whole world to explore, quests to complete, skills to learn, and players to meet.
3/ I sank hundreds of hours in the mines, clicking on rocks to mine ore, then hauling it back to town to smelt and then crafting it into armor to sell.