Market Measures

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Importance of Capital Allocation

Market Measures

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The question we get often is how much capital should I have invested? Usually we don't invest more than 50% of our buying power into positions. But why?

Study
  • SPY, 2005 - present
  • 45 days to expiration
  • Sold 16 delta strangles (16 delta calls and puts)
  • Simulated five $1M portfolios where we continuously allocated 10%, 20%, 30%, 40%, and 50% of our buying power to the strangles
  • Held each strangle to expiration

We find that allocating past 50% showed diminished long term results because of the down turn in 2008. Over the past 14 years, the portfolio that was allocated 40% to strangles performed the best P/L wise.

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