Our Strategy - When It Works Best And When It Doesn’t

Our strategy works best when the market falls off a cliff or when the market is not stagnant. In a sideways market like 2015 or 2018, where we were near flat (up or down slightly), the strategy favors equities and bonds. It is really impossible to know what any market will do in a year. You can forecast, you can speculate, but if the market stays near flat, our strategy will lag the equity and bond mix.

The way we would handle this if the market fell off a cliff is we ride it out until year-end or close to when the puts expire and either exercise or sell the options in the market. We then take the proceeds and re-hedge. Everything should be done on as close to a 12–13 month basis as possible. Every year is different; every year has different market dynamics going on. Getting things down to a year is preferable, but we can work with options contracts dated 18 months out. We just have to be strategic in how we write covered calls, use our puts, and manage the portfolio.

Maybe we are up 54% like we were in 2023. In a situation like that, where we have so much in gains in a 12-month time frame, we would want to sell our current puts and re-hedge to lock in those gains even if we had six months left on the put contracts. We are essentially stair-stepping the hedge every year, locking in those gains one year at a time.