From Greed & Fear To Grow & Protect by Allen Rehert, PhD
A Different Path
When the markets are rallying, little thought is given to protecting your assets. But what happens when the markets turn and start quickly moving down? In this first part of a two-part series, find out how this author follows a set of guidelines to protect his investments.
In November 2004, I wrote an article about using monthly covered calls on the SPDR Dow Jones Industrial Average ETF (DIA). I set the strike price using asymmetry of implied volatility and price reversion to the mean to create a hedge against market declines. This approach worked well during 2005–07, as did most bullish strategies. Then came 2008, which included a market decline. and this exposed significant weaknesses in the strategy. I started anew with a clean sheet of paper and developed a strategy based on nonstatistical rules that targeted 10% annual growth. In this article, I will describe the resulting strategy.