This segment, the second in a twelve part series, explains how to devise a core strategy for a large size account of $250,000 to $2.5 million and how using derivatives can enhance the portfolio. This should provide some ideas and is not intended as an exact blueprint.
The first segment discussed building a core portfolio. This segment presents a possible core strategy and how using derivatives can enhance a portfolio.
The first step is to decide how much capital is being used, both notional and real. This segment used a $250K portfolio using two times leverage. Thus the notional value of the positions will be approximately $500K.
A table showed an example of a core position. It contained 1 short /ES (in place of SPY), 1 short /TF (in place of IWM), long 933 GLD, short 800 TLT and long 2844 EEM all with a notional value close to $100K (/TF was around $122K and /ES $105K). The total notional value was around $527K. The price and margin for each was also displayed and the total margin required was close to $160K.
We can implement cost-basis-reduction strategies with derivatives on each portfolio position once the major positions of the portfolio have been established. We will sell calls against our longs and sell puts against our shorts.
A table showed how selling options against each of these positions could enhance the portfolio and reduce the cost basis by a substantial amount on an annual basis. The underlying, delta of the option, size, option price, max cost basis reduction and max annualized cost basis reduction were displayed along with the total credit received of $4683. The IWM options were used in place of the /TF options because of much tighter markets.
Using these figures the total credit received of $4,683 will reduce the cost basis of our $250,000 portfolio by 1.9% if if we hold them through expiration. When annualized the 1.9% becomes nearly 22%.
Watch this segment of “Top Dogs” with Tom Sosnoff and Tony Battista to see the details of how to construct a core strategy using derivatives that can enhance your portfolio significantly.
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