I wrote an article titled "The Science of Selling Options" that appeared in the September 2012 issue of Active Trader. The article is now available for purchase and download on the Active Trader website. If you missed the September 2012 issue and are interested in reading the article, please follow the above link. The cost of the article is $4.25 and all proceeds go to Active Trader.
Please use the following link to access my first Active Trader article titled "Modeling Implied Volatility." My most recent Active Trader article is not yet available for download; I will provide the link as soon as it becomes available.
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About Brian Johnson
I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers.
I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies.
In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years. I have also written four books on options and derivative strategies.
Are you making money trading? I have been thinking about a robust portfolio strategy, say using broad diversification, similar to ‘ all weather strategy’ with a long term timing component. People I talk to want the ups but want to limit the downs. What are your thoughts?
Good to hear from you again. Trading is going well. While I do some shorter-term swing trading, many of my strategies are longer-term in nature and all contain some element of timing (ironic for a former index fund manager). My long-term strategies are systematic and all have been tested against historical data.
After a significant amount of research, I do believe that it is necessary and prudent to use a systematic long-term timing component for all strategies, especially long-term strategies. Price trends, market breadth, inter-market or relative strength analysis, sentiment, volatility, and fundamental analysis can all be used successfully to construct systematic timing rules.
I originally focused most of my attention on technical analysis, but recently completed some promising research on recession forecasting that I plan to use to augment my long-term market timing decisions. I definitely agree with your thoughts about using a long-term timing component to reduce downside risk.
With respect to the “All Weather Strategy,” I am less enamored with the theoretical benefits of asset diversification as a principal risk reduction tool. Correlations for risk assets can approach 1.0 during periods of crisis, as we saw in 2008.
For the past 15 years, bonds (specifically US Treasuries) have offered diversification benefits relative to stocks and commodities, but that was not always the case. Given that the current level of interest rates is very low, it is certainly plausible that we could experience another period of stagflation in the future (similar to the 70s) and bonds and stocks could both suffer simultaneously (although commodities would do well).
In addition, if you plan to use a long-term market timing component on each asset class, then by definition you would only hold each asset when it was rising – at least in theory. If we accept it is possible to use long-term timing to reduce risk, then we would lose the theoretical benefits of diversification when we only own a subset of the All Weather portfolio. As a result, the All Weather portfolio strategy seems to be inconsistent with a market timing approach.
Unlike the All Weather strategy, a relative strength or rotational asset allocation strategy could be used with a market timing approach. I use this type of strategy and others have also been successful with this approach as well.
While I am not a proponent of asset diversification, I am a believer in strategy diversification. Using multiple strategies that are not highly correlated to reduce portfolio risk makes a lot of sense.
I would be interested in your progress as you move forward with your strategy development. Keep in touch.