Enhanced Indexing Strategies: Utilizing Futures and Options to Achieve Higher Performance

305 Pages·2008·5.61 MB·English

by  Tristan Yates

Wiley Trading
E N H A N C E D
INDEXING
S T R A T E G I E S
Utilizing Futures
and Options to Achieve
Higher Performance
Tristan Yates
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Enhanced
Indexing
Strategies
i
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Enhanced
Indexing
Strategies
Utilizing Futures and Options
to Achieve Higher Performance
TRISTAN YATES
JohnWiley&Sons,Inc.
iii
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Copyright(cid:1)C 2009byTristanYates.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Yates,Tristan.
Enhancedindexingstrategies:utilizingfuturesandoptionstoachievehigher
performance/TristanYates.
p. cm.–(Wileytradingseries)
Includesindex.
ISBN978-0-470-25925-2(cloth)
1. Indexmutualfunds. 2. Stockpriceindexes. 3. Investments. 4. Portfolio
management. I. Title.
HG4530.Y3652009
332.64(cid:2)5–dc22
2008019098
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
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Contents
Preface xi
CHAPTER 1 Owning the Index 1
TheStoryofIndexing 1
Indexing:StrategyorPhilosophy? 3
ActiveInvestmentSelection 3
IndexInvestingandtheEfficientMarkets 4
ReconcilingIndexingandActiveInvesting 5
IndexRiskandReward 6
DriftandNoise 7
Momentum,MeanReversion,andMarketCycles 8
CyclesandRegimeChange 12
UnderstandingVolatility 14
HighPerformanceIndexes 18
SmallCapandValuePremium 19
StockMigration 23
AdditionalFactors 25
ForecastingIndexReturns 27
Summary 27
CHAPTER 2 Applying Leverage 29
LeveragedInvestments:Conservation
ofRisk 29
UsingtheLeverageRatio 32
UnderwaterInvestments 34
DebtandInterestEffects 38
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vi CONTENTS
SourcesofLeverage 39
MarginLoans 39
Futures 41
Options 42
Example:Synthetics 42
OtherDebtSources 43
ManagingaLeveragedPortfolio 44
PortfolioSizing 44
PortfolioAllocations 46
RebalancingwithLeverage 50
DollarCostAveragingandLiquidityPreference 51
ReinvestingLeveragedGains 52
Summary 56
CHAPTER 3 Indexing with Synthetics and Futures 59
AssetAllocation 59
IndexPortfolioReturns 62
ApplyingLeverage 63
HoldingSyntheticPositions 64
TransactionCosts 67
ExpectedReturnsandReinvestment 68
AddingPortfolioVolatility 68
RandomScenarioswithMonteCarlo 72
MarginCalls 74
SubstitutingFutures 77
Summary 80
CHAPTER 4 Capturing Index Appreciation with Calls 83
IntuitiveOptionPricing 83
OptionsasPotentialLiabilities 84
StrikePrices 86
TimeandVolatility 86
DividendsandInterestRates 87
FollowinganOption 87
RiskComponentsofVariousOptions 89
CapturingAppreciationwithOptions 90
DailyCostofOptions 91
VolatilitySkew 94
UnevenAppreciation 96
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Contents vii
OptionAnalysis 98
MarginalReturns—ExtendingTimeorLoweringStrike 99
Out-of-the-Money 100
MonthlyReturnsofCalls 103
MoreaboutVolatility 105
Summary 107
CHAPTER 5 Leveraged Covered Calls with Futures 109
CoveredCallsasaSourceofIncome 109
PositionDetails 110
ExpectedStrategyReturns 111
AnnualReturnBacktests 113
VIXModifications 114
AssetAllocation 117
AdditionalAnalysis 118
Summary 119
CHAPTER 6 Rolling LEAPS Call Options Explained 121
UnderstandingLEAPSCalls 122
LEAPS—bytheGreeks 123
OneYearLater 125
RollingLEAPSForward 127
RollCostPrediction 128
EstimatingAverageReturns 130
InvestingCashFlow 132
CapturingAppreciation 134
RollingUp 135
SelectingIndexesandStrikePrices 137
MarketDropsandVolatilitySpikes 139
LEAPSCoveredCalls 141
Summary 142
CHAPTER 7 Long-Term Returns Using Rolled LEAPS 145
StrikePriceSelection 145
SectorPerformance:1999to2006 146
SectorPortfolioReturns 149
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viii CONTENTS
Rebalancing 153
HigherPerformancePortfolios 154
ReinvestmentIssues 157
CoveredCallsandMid-Caps 158
CoveredCallswithSectors 159
Summary 160
CHAPTER 8 Long and Short Profits with
Call Spreads 163
UnderstandingDebitSpreads 164
BullCallSpreads 165
CallSpreadsandAppreciation 166
SpreadsandSkews 169
EarlyExit 170
StaggeredExit 171
DiagonalCallSpreads 173
Long/ShortPortfoliosfromDiagonals 175
EarlyExitandTheta 177
CalendarCallSpreads 180
LEAPSCalendarCallsandEarlyExits 182
CyclingInvestmentGains 182
ReinvestmentStrategies 185
ConstantInvestmentandHybrid 186
IndexRegimeChange 187
Summary 188
CHAPTER 9 Cycling Earnings Using
Spread Positions 191
ShortOptionSelection 192
LongOption 192
CreatingtheDiagonalSpread 193
OptionPortfolio 195
CyclingFractionalandFixed 196
FasterReinvestment 198
TransactionandSpreadCosts 200