This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

PWR Strategy: The ETF Universe

This complimentary article from Options Profits was originally published on January 3 at 7:42am EST. Don't risk missing over 40 options trade ideas every week and exclusive commentary from over 10 experts. Click here for more information.

In two previous posts ( here and here), I introduced a tactical asset allocation or "rotational" strategy that uses relative strength and momentum criteria to select ETFs on which we can sell bullish vertical put spreads.

The attached table shows the list of ETF candidates we select from each month. 

PWR Strategy ETF Universe
Source: ETF Rewind, Condor Options

 

The list represents every major asset class including U.S. and international stocks, U.S. bonds, oil, gold, agricultural commodities, the dollar, and the euro. Let's review some omissions. With the exception of iShares Dow Jones US Real Estate (IYR), none of the U.S. equity sector ETFs made the list, and the reason is that they scored very similarly to the major stock indexes in most tests. In other words, they didn't offer much diversification at the time horizon we cared about, and as a result were not selected very often for allocations.

The same reasoning applies to "me-too" alternatives to other assets here: iShares Silver Trust (SLV), PowerShares DB Com Indx Trucking Fund (DBC), and some of the other country-specific ETFs were considered, but their correlations to other peers ( SPDR Gold Trust (GLD), PowerShares DB Agriculture Fund (DBA), and iShares MSCI Emerging Markets Index (EEM), respectively) was high enough over the long run that they weren't showing up often in selection results. Finally, there were a few underlyings that were of real interest, but simply didn't have enough option volume to warrant inclusion in the strategy: CurrencyShares Swiss Franc Trust (FXF) was one example.

The resulting list of 17 ETFs is still long enough to provide us with genuine opportunities for macro-level diversification, and has the virtue of offering a simpler and more intuitive set of trade candidates.

In the next post on this strategy, I will discuss the rational behind the three-slot allocation method.

================

The updated strategy allocation as of 12/31/11 is:

TLT: 100%

GLD: 20%

QQQ: 40%

The only change from the week prior was in QQQ, so we will reduce our size in the January 54/55 put vertical from five units to two; the spread was last priced at $0.26.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.

Jared can be followed on Twitter at twitter.com/CondorOptions.

At the time of publication, Jared Woodard held the position described.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
DBA $22.35 0.00%
DBC $18.00 0.00%
EEM $43.84 0.00%
GLD $113.05 0.00%
IYR $78.15 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports