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From Theory To Practice

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Strategic Diversification

From Theory To Practice

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The tried and true, old school way of passively diversifying your portfolio (index funds, stocks/bonds mix, etc.) is a thing of the past. True diversification needs to be about diversifying your strategies, not necessarily diversifying your assets. This type of approach opens up the menu of opportunities that allows you to trade successfully in all different market conditions.

In low implied volatility environments, an environment that would undoubtedly benefit the passively diversified investor as the market is most likely climbing higher, we would look to debit spreads, calendar spreads, or maybe even a poor man’s covered call/married put to stay active, stay engaged, and continue to grind higher. In high implied volatility environments, our wheelhouse and the arch nemesis of the passively diversified investor, the world is truly our oyster. We have a myriad of strategies at our disposal, all of which are aimed at taking advantage of two empirical facts: volatility mean reversion and volatility’s overstatement of expected moves. True diversification is about expanding your knowledge and know-how, improving your abilities, and cultivating your skillset. It has nothing to do with assets or underlyings.

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