Enhanced Indexing Strategies

Leveraged index investments, including index futures, options, and ETFs, are one of the fastest growing products in finance, as both retail and institutional investors are attracted to their long-term returns and capital efficiency. With Enhanced Indexing Strategies, author Tristan Yates reveals how you can create and build high-performance indexing strategies using derivatives that can potentially generate much higher returns than conventional index investing. In addition, Enhanced Indexing Strategies introduces six innovative long-term indexing strategies using futures and options, each with its own advantages and applications. Preface.

CHAPTER 1 Owning the Index.

The Story of Indexing.

Indexing: Strategy or Philosophy?

Active Investment Selection.

Index Investing and the Efficient Markets.

Reconciling Indexing and Active Investing.

Index Risk and Reward.

Drift and Noise.

Momentum, Mean Reversion, and Market Cycles.

Cycles and Regime Change.

Understanding Volatility.

High Performance Indexes.

Small Cap and Value Premium.

Stock Migration.

Additional Factors.

Forecasting Index Returns.

Summary.

CHAPTER 2 Applying Leverage.

Leveraged Investments: Conservation of Risk.

Using the Leverage Ratio.

Underwater Investments.

Debt and Interest Effects.

Sources of Leverage.

Margin Loans.

Futures.

Options.

Example: Synthetics.

Other Debt Sources.

Managing a Leveraged Portfolio.

Portfolio Sizing.

Portfolio Allocations.

Rebalancing with Leverage.

Dollar Cost Averaging and Liquidity Preference.

Reinvesting Leveraged Gains.

Summary.

CHAPTER 3 Indexing with Synthetics and Futures.

Asset Allocation.

Index Portfolio Returns.

Applying Leverage.

Holding Synthetic Positions.

Transaction Costs.

Expected Returns and Reinvestment.

Adding Portfolio Volatility.

Random Scenarios with Monte Carlo.

Margin Calls.

Substituting Futures.

Summary.

CHAPTER 4 Capturing Index Appreciation with Calls.

Intuitive Option Pricing.

Options as Potential Liabilities.

Strike Prices.

Time and Volatility.

Dividends and Interest Rates.

Following an Option.

Risk Components of Various Options.

Capturing Appreciation with Options.

Daily Cost of Options.

Volatility Skew.

Uneven Appreciation.

Option Analysis.

Marginal Returns—Extending Time or Lowering Strike.

Out-of-the-Money.

Monthly Returns of Calls.

More about Volatility.

Summary.

CHAPTER 5 Leveraged Covered Calls with Futures.

Covered Calls as a Source of Income.

Position Details.

Expected Strategy Returns.

Annual Return Backtests.

VIX Modifications.

Asset Allocation.

Additional Analysis.

Summary.

CHAPTER 6 Rolling LEAPS Call Options Explained.

Understanding LEAPS Calls.

LEAPS—by the Greeks.

One Year Later.

Rolling LEAPS Forward.

Roll Cost Prediction.

Estimating Average Returns.

Investing Cash Flow.

Capturing Appreciation.

Rolling Up.

Selecting Indexes and Strike Prices.

Market Drops and Volatility Spikes.

LEAPS Covered Calls.

Summary.

CHAPTER 7 Long-Term Returns Using Rolled LEAPS.

Strike Price Selection.

Sector Performance: 1999 to 2006.

Sector Portfolio Returns.

Rebalancing.

Higher Performance Portfolios.

Reinvestment Issues.

Covered Calls and Mid-Caps.

Covered Calls with Sectors.

Summary.

CHAPTER 8 Long and Short Profits with Call Spreads.

Understanding Debit Spreads.

Bull Call Spreads.

Call Spreads and Appreciation.

Spreads and Skews.

Early Exit.

Staggered Exit.

Diagonal Call Spreads.

Long/Short Portfolios from Diagonals.

Early Exit and Theta.

Calendar Call Spreads.

LEAPS Calendar Calls and Early Exits.

Cycling Investment Gains.

Reinvestment Strategies.

Constant Investment and Hybrid.

Index Regime Change.

Summary.

CHAPTER 9 Cycling Earnings Using Spread Positions.

Short Option Selection.

Long Option.

Creating the Diagonal Spread.

Option Portfolio.

Cycling Fractional and Fixed.

Faster Reinvestment.

Transaction and Spread Costs.

Fast Cycling with Calendars.

Sample Run.

Volatility Modeling.

Weekly Volatility Simulation.

Weekly Strategy Returns.

Summary.

CHAPTER 10 Practical Hedging with Put Spreads.

About Put Options.

Selling Puts versus Covered Calls.

Seller Risk in Pricing.

Protecting Portfolios.

Puts, Futures, and Leverage.

Diversification and Correlation.

Collared Portfolios.

Bear Put Spreads and Speed Bumps.

Bull and Calendar Put Spreads.

Calendar Put Spread.

Deep-in-the-Money Calendars and Diagonals.

Rolling LEAPS Puts.

Rolling LEAPS Calendar Spread.

Summary.

CHAPTER 11 LEAPS Puts and Three Ways to Profit.

Portfolio Safety Nets.

Expected Returns and Hedging Analysis.

Correlated Indexes Using SIMTOOLS.

Correlated Protected Portfolios.

LEAPS Calendar Put Spreads.

LEAPS Calendar Put Portfolios.

Historical Performance.

Put Writing with LEAPS.

Expected Returns.

Scenarios.

Summary.

CHAPTER 12 Managing the Leveraged Multistrategy Portfolio.

The Question of Alternative Assets.

The Solution: Own the Producer.

ProShares ETF Analysis.

Multiplier Leverage Effect.

Learning from Failure.

Asset Management Overview.

Security Selection.

Long and Short Strategy Combination.

Strategy Selection.

Minimum Investment Sizes.

Index Exposure.

Summary.

Final Words.

APPENDIX List of Index ETFs and Futures.

About the Author.

Index.

TRISTAN YATES researches and writes about global index investing, leveraged portfolio management, and derivative strategies for many publications, including Futures & Options Trader, Seeking Alpha, and Investopedia, and his articles are distributed through Yahoo! Finance, Forbes, Kiplinger, and MSN Money. An industry expert on leveraged ETFs, his research has been cited in the Wall Street Journal.

Index funds are among the highest performing and most reliable investments available in the marketplace. Over the past several years, literally hundreds of index-related products have been introduced to the marketplace, most designed to provide investors with the capability to mix and match different funds in order to build custom portfolios. At the same time, leveraged investment products for the retail investor—which use borrowed capital to increase the returns within the structure of a passive investment strategy—are also one of the fastest growing products in the financial world. In Enhanced Indexing Strategies, Tristan Yates shows how to successfully combine these products using leveraged indexing to deliver better risk-adjusted returns than conventional approaches.

The idea behind leveraged investing is simple: if long-term investment returns are predictable, then even higher returns can be generated by borrowing and investing the capital over the long term in an index. Using derivatives such as futures and options, Yates reveals it is possible to not only borrow money to invest at a low rate, but also to implement hedging strategies that help reduce the risk of catastrophic losses.

Unlike other books on options trading that tell how to profit from short-term market movements, Enhanced Indexing Strategies uses options positions to capture long-term pricing trends. Using long calls and call spreads, hedging strategies, and LEAP call options—which have been hailed as an industry innovation due to their ability to maintain leverage while managing risk—Yates shows how to implement specific long-term strategies that can capture appreciation in volatile conditions across many years.

In addition to providing six different innovative long-term indexing strategies using futures and options, Yates also offers important advice on managing a leveraged investing portfolio. He covers each critical aspect of portfolio management: selecting indexes and strategies and determining the level of exposure, calculating the expected returns and the possible range of returns, and monitoring the portfolio to ensure that it is performing in accordance to projections. Yates’s final piece of advice to investors is simple: get started. Every day you’re not invested in an index is a missed opportunity for profits.

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