If you’ve enjoyed the content on this blog about building expanded canvas capital efficient portfolios, you’re in for a real treat today.
I’m thrilled to welcome David Sun (AKA The Trade Buster) to “The Strategy Behind The Fund” interview series.
David has emerged from an amateur trading background to currently running two options based hedge funds.
We’ll learn about his unique approach of combining trend following and various options based strategies.
Without further ado, let’s turn things over to David!
Meet David Sun: The Trade Buster
David is the host of The Trade Busters, an options focused educational podcast aiming to empower the everyday retail trader. Starting out as an individual trader in 2008, David went on to launch and now manages two options based hedge funds.
He was featured as a tastylive Rising Star in 2019 and has also appeared on prominent podcasts such as Flirting with Models, ReSolve Riffs and Chat With Traders.
As an educator, David provides unique ways of thinking through sizing, risk and leverage, as well as asset allocation and portfolio construction.
source: Flirting with Models on YouTube
Hey guys! Here is the part where I mention I’m a travel content creator! This “The Strategy Behind The Fund” interview is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor.
What’s The Trade Busters Strategy?
For those who aren’t necessarily familiar with your style of asset allocation, let’s first define what it is and then explain this strategy in practice by giving some clear examples.
Typically, asset allocation is thought of as deploying cash into various assets such as equities, bonds, commodities, etc. A dollar allocated gets you a dollar of exposure.
With the introduction of return stacked ETFs, retail now has access to increased capital efficiency since a dollar allocated can get you, for example, two dollars of exposure. However, what a lot of retail investors don’t know is there is an additional source of capital efficiency they can tap into, which is using options as an overlay.
I’m not talking about just spending cash to buy options as a form of leverage but the fact that when selling/writing options, most assets in your account can be used as collateral against that position. A lot of people think that cash is required as collateral when selling options but in fact you can use t bills, equities and even ETFs such as the return stacked ones.
So for example, 100k invested in RSBT would get you 100k exposure to bonds, 100k exposure to the trend replication strategy, but in a portfolio margin account the position would give you about 80-85k of options buying power against which you can sell options.
I know you have published a lot of content on various permanent portfolio setups. Imagine being able to run one of those and overlaying an entire suite of various options strategies on top.
Unique Features Of The Trade Busters Strategy
Let’s go over all the unique features of your portfolio so practitioners can better understand it. What key exposure does it offer? Is it static or dynamic in nature? Is it active or passive? Is it leveraged or not? Is it a rules-based strategy or does it involve some discretionary inputs?
I want to start off by mentioning that practically all of the concepts and many of the strategies I will refer to in this interview are documented and taught in detail in my podcast, “The Trade Busters” along with the accompanying Google Sheets pages. The portfolio has 4 main buckets, one that is trend following based and three which are options based, which I will detail below:
source: ReSolve Asset Management on YouTube
Trend Following
1) For trend following, we simply hold a basket of trend following style ETFs. Your audience will already be familiar with the tickers such as RSBT and DBMF. We like this asset and hold it for all the same reasons you have shared so many times before so there is not much else for me to add. 🙂
Intraday Options
2) Intraday options (0 DTE). We run a multitude of 0 DTE strategies most of which are selling options but we do occasionally buy options. What is nice about 0 DTE is the lack of overnight exposure since your positions will expire (or be stopped out) by the end of each trading day. The way we differentiate between strategies is through various trend signals that will tilt our directional bias.
However, we aren’t looking to traditional indicators such as moving averages, RSI, etc for our signals. Rather, we are observing various parts of the volatility surface and watching how the options prices behave. For example, put option prices contracting or call option prices expanding at a certain rate may indicate a bullish trend.
Short Dated Options
3) Short dated options (1-7 DTE). Although I mentioned above 0 DTE has the advantage of avoiding overnight risk, there is still the case to sell overnight options assuming the exposure can be properly hedged. This group of strategies is looking to sell options (both puts and calls) expiring the following day (On Monday, we sell the Tuesday expiration and on Tuesday, we sell the Wednesday expiration, etc). This type of strategy is generally very high risk since the sold options will be near the money and any meaningful gap the next day will cause them to incur substantial losses.
One common way to hedge this risk is to buy further out of the money low delta options as insurance. However, due to the short term nature of the sold options, they will be particularly sensitive to market moves (high gamma exposure) and traditional out of the money hedges won’t be effective. Instead, we actually use near the money or even at the money structures such as straddles and tight strangles to hedge our exposure. This may seem counterintuitive as we are essentially hedging a cheaper sold option with a much more expensive bought option.
What we have found is that with the proper management, “expensive” options don’t necessarily cost you (in the long term) as much as one might expect. I’ll touch a bit on this topic in Q4 below as well.
Long Dated Options
4) Long dated options (90 DTE). This strategy is probably the most naive but is elegant in its simplicity. We are simply systematically selling put options every single day. In order to keep our exposure and risk in check, we apply simple profit taking and stop loss mechanics on all of our positions.
Having a profit take improves capital efficiency since you don’t need to carry an option to expiration to extract most of its value. The use of stop losses can be seen as a blunt instrument but prevents us from taking exorbitant losses, which is the primary goal. As far as hedging, we have a fixed budget for buying further out of the money options anywhere between 60-90 DTE. There is nothing really fancy about this, we simply see it as a fixed cost of doing business.
Since this strategy only sells puts (on the S&P), it will naturally be correlated with the market. However, applying the stop loss means a better risk-adjusted return and this strategy as a source of beta as opposed to simply buying and holding index funds.
Additional Thoughts
A few points to add on the strategies above. All the options strategies are based on S&P options which means in practice, you can use /MES, SPY, XSP, /ES or SPX. Implicitly the strategies are going to be leveraged but as noted they all have risk management via a stop loss, a hedge, or both. Finally, they are 100% rules based with 0 discretion.
What Sets The Trade Busters Approach Apart From Other Asset Allocation Strategies?
How does your approach set itself apart from other hedge funds, mutual funds, etc. being offered in what is already a crowded marketplace? What makes it unique?
I would say our emphasis on an ensemble of options based strategies paired with our obsession with risk management and the reduction of volatility drag is what makes us unique. There is an interesting virtuous cycle wherein the more strategies we have, the smaller we size them and thus the less risk we take with each one.
At the same time, as long as the correlation between the strategies is low, having more will act to reduce the variance of the entire portfolio. This is basically using Ray Dalio’s holy grail approach, which you can find a video of on YouTube.
source: Investopedia on YouTube
What Else Was Considered For The Trade Busters Portfolio?
What’s something that you carefully considered adding to your fund that ultimately didn’t make it past the chopping board? What made you decide not to include it?
Our decision criteria for adding new strategies to the ensemble has evolved over time along with our viewpoint on the importance of diversifiers. Before, whenever we developed a new strategy, it could get rejected simply if the expected ROC was meaningfully lower that what we were already running.
As we came to appreciate the benefit of having diversified return streams, we realized sometimes a strategy with lower ROC could still help to lower the volatility of the portfolio. Just like the idea before a 60/40 stock/bond portfolio, you hope that when one strategy zigs, the other zags. With this in mind, we were occasionally open to adding strategies with a lower ROC if it could produce a bump to the portfolio’s sharpe ratio, MAR ratio, and/or other risk metrics.
Finally, when we leaned more into long volatility strategies, we really took this concept to the extreme by even examining 0 expectancy or slightly negative expectancy strategies. As you would expect, long volatility strategies are typically uncorrelated or even negatively correlated to short volatility strategies.
Additionally, they have the benefit of a much more favorable reward/risk ratio. So we found there could be very interesting effects when adding a certain return stream that by itself maybe does not produce P/L, but can go a long way to smoothening the volatility of the entire portfolio.
When Will The Trade Busters Portfolio Perform At Its Best/Worst?
Let’s explore when your strategy has performed at its best and worst historically or theoretically in backtests. What types of market conditions or other scenarios are most favourable for this particular strategy? On the other hand, when can investors expect this strategy to potentially struggle?
I have only been able to backtest the strategies back to 2013. I know that statistically speaking, this may still be considered a small sample but at least in the tested time frame, the portfolio has been positive every year. I believe this is due to the diversity of return streams included.
During periods of low volatility, the short options strategies provide a consistent P/L while years like 2018, 2020 and 2022 allow the long options components to really shine. Hypothetically, I would expect a challenging environment to be one with a lot of whipsaws where the market moves just enough to trigger our stop losses but then reverses and causes our hedge positions to subsequently lose value.
I have certainly seen this occur on a few occasions but it is typically not prolonged and over a longer period like a year, the portfolio seems to have been robust against anything the market throws at it.
Why Should Investors Consider A Trade Busters Style Of Portfolio?
If we’re assuming that an industry standard portfolio for most investors is one aligned towards low cost beta exposure to global equities and bonds, why should investors consider your strategy?
To borrow a phrase from Rodrigo Gordillo at ReSolve, the idea behind our approach is to “yes and” the problem. The fact is, there is an entire additional source of return from options that can be tapped into and overlaid on top of whatever approach you are already doing. Furthermore, the options universe itself is vast and various strategies can be combined that provide diversification across different underlyings and different time horizons.
How Does The Trade Busters Portfolio Fit Into A Portfolio At Large?
Let’s examine how your strategy integrates into a portfolio at large. Is it meant to be a total portfolio solution, core holding or satellite diversifier? What are some best case usage scenarios ranging from high to low conviction allocations?
This is meant to be a total portfolio solution. It’s similar to the Cockroach Portfolio in that it has exposure to equity beta, long volatility and trend following. The main addition is the short volatility component and harvesting the volatility risk premium as a return driver.
The Cons of The Trade Busters Portfolio
What’s the biggest point of constructive criticism you’ve received about your strategy/portfolio?
The biggest drawback behind our approach is that while I state it can be implemented at the retail level, it does require a decent amount of capital to run “properly”.
If you want to run multiple strategies, you’ll need to use smaller products such as SPY/XSP instead of SPX and with smaller products you lose some economies of scale, etc.
At the very least a portfolio margin account is recommended, which probably leaves out a decent segment of the retail DIY demographic.
The Pros of The Trade Busters Portfolio
On the other hand, what have others praised about your strategies/portfolio?
People often appreciate the simplicity and “low touch” nature of the strategies that I teach. One of the ideas I have been really obsessed with is the concept of “Return on Time”.
I feel like there is this dichotomy between being a 100% passive buy-and-hold investor and a 100% active glued-to-the-screen day trader. I believe retail practitioners have the opportunity to add significant value to their investments through low-touch systematic strategies without having to devote hours of screen time.
Your audience is already familiar with this in the form of permanent portfolios that only require once a month or once a quarter rebalancing.
Embracing The Golden Age Of Investing For Retail Investors
We’ll finish things off with an open-ended question. Is there anything that we haven’t covered yet that you’d like to mention about your strategy? If not, what are some other current projects that you’re working on that investors can follow in the coming weeks/months?
I think the last couple of years have been the start of a golden age for retail investment. As your work has shown, there is an abundance of products now available which provide access to a multitude of strategies and exposures.
It can be a little daunting to absorb all the information but I think most of the lift is in the initial education. The actual implementation of various solutions can be simple, low touch and hopefully stress-free without large risk taking.
And for those that want to dive more into the options world, definitely check out my podcast.
Connect With David Sun AKA The Trade Busters
My X handle: @TheTradeBuster
My podcast: The Trade Busters can be found on most major podcast platforms (https://open.spotify.com/
My trading page/Google Sheets: www.thetradebusters.com When you first go there, at the top left, there will be a list of some of my previous podcast/interview appearances.
Interview on ReSolve Riffs: https://www.youtube.com/watch?
Nomadic Samuel Final Thoughts
I want to personally thank David for taking the time to participate in “The Strategy Behind The Fund” series by contributing thoughtful answers to all of the questions!
If you’ve read this article and would like to have your fund featured, feel free to reach out to nomadicsamuel at gmail dot com.
That’s all I’ve got!
Ciao for now!
Important Information
Investment Disclaimer: The content provided here is for informational purposes only and does not constitute financial, investment, tax or professional advice. Investments carry risks and are not guaranteed; errors in data may occur. Past performance, including backtest results, does not guarantee future outcomes. Please note that indexes are benchmarks and not directly investable. All examples are purely hypothetical. Do your own due diligence. You should conduct your own research and consult a professional advisor before making investment decisions.
“Picture Perfect Portfolios” does not endorse or guarantee the accuracy of the information in this post and is not responsible for any financial losses or damages incurred from relying on this information. Investing involves the risk of loss and is not suitable for all investors. When it comes to capital efficiency, using leverage (or leveraged products) in investing amplifies both potential gains and losses, making it possible to lose more than your initial investment. It involves higher risk and costs, including possible margin calls and interest expenses, which can adversely affect your financial condition. The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the official policy or position of anyone else. You can read my complete disclaimer here.
