Aggressive Strategies with Purchase Options (Calls) allow you to optimize yields in the bullish phases of the Market.
We will emphasize the Options, among the many Aggressive Strategies available.
It is also common to use other means, such as:
Increase the percentage of risk assets in your portfolio
Leverage your risk position by taking on debt
Choose higher-risk assets to integrate your portfolio
We prefer to use the purchase options, as they offer us a wide potential for profits but limited losses.
When we buy calls, we pay a price (called a premium), and that price is all we can lose if the chosen time is wrong.
When to start Aggressive Strategies with Options?
The answer depends on the analysis method you’ve chosen to decide your investments.
You can use technical, fundamental or academic analysis.
In the first two cases, you seek to find «expensive» and «cheap» levels, either in the general market or in certain assets in particular.
So you’ll be aggressive when you identify «cheap» or uptrend assets.
Instead, when you use the academic approach you give up trying to predict the market, and you only adapt to it.
Let’s detail examples of Aggressive Strategies with Options based on academic analysis, which is the one we prefer.
Under this approach, we will be aggressive when our RISK permits.
Our attitude towards risk allows us to do so when the risk expected by the market decreases (measured by implied volatility).
Implied Volatility: VIX – VXN, analyzed here
In addition, we can be aggressive when our risk capacity increases.
This occurs when our previous yields have been positive, and we can risk some of our profits.
Case Analysis: Our Investment Policy
Let’s take a closer look at an example, which can help you generate your own Aggressive Strategies with Options.
Our investment policy is based on data so specific and measurable that it is expressed in financial algorithms.
So our Strategies respond to objective and systematic patterns.
First, let’s note that AL SIMPLE’s investment algorithms will generate positive yields in the bullish phases of the market for two reasons:
We ALWAYS maintain our position in QQQ, so our stock portfolio will reflect market ups.
We execute Aggressive Strategies that will generate additional yields in times of rising.
In this section we explain these strategies, disclosing their triggers and their instruments (calls, purchase options).
Finally, we analyze the results achieved and the frequency of this operation.
Aggressive Strategy Triggers with Options
We have two triggers of aggressve strategies in our algorithmic trading:
The Performance of Our Portfolio
The Risk of Our Portfolio
When the performance of our portfolio in recent months is positive, we are able to take a little more risk.
We know that we are at an uptrend in the market, although we do not know if it will continue.
What we do know is that we have room to absorb some loss.
If we execute an aggressive strategy, and it goes wrong, we will only have lost some of our profits.
We will always take limited risks, as we will see later in this section.
We are also aggressive in the face of significant reductions in the risk of our portfolio.
That risk is constantly measured by the volatility indicator, VXN.
When we appreciate that reduction, we execute an aggressive strategy, as objectively (VXN is a market price) it has a lower risk of going wrong.
Purchase Options (Calls)
To execute aggressive strategies, whether generated by good yields or volatility reductions, our algorithms generate instructions to buy calls.
Let´s see an example with QQQ trading at 300.
In the face of an aggressive trigger, algorithms generate a Strategy Alert such as the following:
Buy a CALL, at the 305 exercise price, due February 15.
From that moment, until the expiration of the trade, our algorithms will observe the market behavior, and indicate when to terminate the strategy, selling the purchased option.
Completion will be because you have reached a performance goal, because you have reached a maximum loss limit, or because the option is short of time to expire.
If the scenario to be aggressive is maintained, for yields or risks, the day after the end of the strategy we will start it again, although the excercise values and the maturity period will be different.
The Results
As it is an algorithmic trading approach, before starting the implementation of our policy (in 2019) we backtested its effectiveness.
These were the average annual yields («Rendimiento Anual Promedio», in spanish) for the period 2007-2018:
And these were the yields since 2019, when we started to publish the algorithms:
The Frequency
On average, we start 14 aggressive strategies per year.
That is, to start and finish them, we trade the market 28 of the 250 trading days of the year, more than once every two weeks.
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