The 2015 trading year has been marked by several headlines that will likely make it memorable in the collective market memory.
The absolute demolition in crude oil prices is certainly one story that stands out, although further context is needed to fully understand if this is only a temporary pullback or a lasting paradigm shift.
If the US equities market closed the books for 2015 today, the S&P would only be up a negligible 20-or-so points for the entire year. Barring a miracle or disaster, the market will probably hang in this range through the start of 2016 - all this despite a recent move by the United States Federal Reserve to raise interest rates by a quarter point.
The prevailing themes from 2015 bring to mind memories of a Market Measures episode from a few months ago that in hindsight looks even more pertinent.
This particular episode of Market Measures focused on a discussion comparing passive versus active investing - the tastytrade financial network being of course a supporter of the latter.
As usual, the tastytrade research team dug deep and answered the question using historical evidence to get a broader perspective. Findings that now shine even brighter with another year of data almost in the books.
The team conducted an intensive study that compared passive and active investing strategies going back as far as January 2000 to ascertain just how successful each method has been.
The study involved four specific strategies that were back-tested from January 2000 to January 2015:
As you can see from the above, Strategies 1-3 involved active management, while Strategy 4 was passive (buy and hold) only.
One notable difference in Strategies 1-3 was that the first two involved holding the S&P 500 alongside selling calls, while Strategy 3 involved holding Treasury Bills (t-bills) coupled with selling puts in the S&P 500. The main difference between Strategies 1 and 2 was that an upside call was sold in Strategy 2, while an at-the-money call was sold in Strategy 1.
The results below indicate that active management strategies have been the clear winner in terms of returns - especially the t-bill strategy:
On the show, Tom and Tony refer to the t-bill and short-put strategy as "the cash-secured put." They also explain that this involved selling an at-the-money put in the S&P 500 while investing the money that would be used to buy the S&P 500 into Treasury bills.
They additionally note that Treasury bills are short-term debt backed by the United States government with maturities of less than one year. These securities function like zero-coupon bonds (no monthly interest is paid) and the price fluctuating based on the market.
Examining the results of the study further, the Market Measures team outlines some risk-related takeaways. Measuring the volatility of each respective strategy, they found that the cash-secured put (t-bill) method also had a low absolute standard deviation as compared to the other three strategies.
Taken in sum, this information clearly reinforces the notion that active investing can outperform passive investing over time, on average - and with a lower overall level of volatility.
We invite you to watch the full episode of Market Measures focusing on passive versus active investing when your schedule allows.
If you have any questions or feedback on this programming (or any other from 2015) we encourage you to contact us at firstname.lastname@example.org.
Thank you again for being the most important part of the tastytrade community.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.