I do quite a lot of market timing,
long term in nature. Similar length as 200 MA crossover, just to give you an
idea of the length. Normally I buy index ETFs like SPY or QQQQ.
wonder if there is a good way to add options instead – and if possible – add
some leverage to the strategy. The drawdowns I have are quite small (8-10%) and
my timing system would be even better with some leverage and I do think I can
live with 2-3 times the drawdown if the results go from today's 14% to
2 or 3x that amount.
Today when I add leverage I must pay interest for
margin. I guess options are a way to avoid this? I mean, add leverage without
need of extra capital. What are your thoughts here?
Thanks for your time.
[Note to rookies: MA = moving average. 'Drawdown' represents the maximum amount lost over period of time, before you once again become profitable]
Your first priority is to not jeopardize your current results. If you want to earn additional profits while minimizing risk, options can help. The ideas I recommend require little margin, and you can meet that requirement by buying a few less shares of your ETF.
If you want additional leverage, the simplest strategy is to buy puts or calls. I dislike that strategy in general – because it's too difficult to consistently make money – but in your situation, it's an especially poor idea. As a longer-term trader, you would find yourself holding options and watching time eat away at the premium. Buying options may be appropriate if you find a very short-term trade, but I don't think it's a good idea for you, unless you anticipate a LARGE market move.
As a long-term trader, you want to take advantage of the passage of time. And because you earn decent profits, it appears that your methods are profitable. Thus, I recommend a low risk, low margin strategy that you can use in conjunction with your normal purchase of ETFs.
Next time you have a bullish situation, instead of only buying ETFs, put 10% of your capital into selling out of the money (OTM) put spreads for a cash credit. This requires no extra margin, and there are two advantages. First, the ETF doesn't have to increase in value for you to earn a profit. If SPY falls by a small amount, you still make money. Second, because those option spreads expire in a relatively short time (choose 1-,2-,or 3-month spreads), you may have an opportunity to sell such spreads again and again during your longer-term cycle.
These spreads offer an opportunity to earn far more than 14% annually – but don't fall into the trap of believing it's easy money. If you use this method at appropriate times, you have the opportunity to make anywhere from 2 to 10% in a month or two. It's important that you manage the risk of each spread, and not allow any to inflict a large loss – if the market moves against you over the short-term. But, that's normal portfolio risk management.
You can sell call spreads when bearish.
Although I doubt you would ever use it, you can buy iron condors any time you are market neutral over the short term.
These are all limit loss/limited gain methods, but each has a small margin requirement and allows you to gain the advantage of collecting time decay.
Of course, to be a consistent winner with these methods, your ability to pick direction must continue to be reasonably accurate.