A.I.M. Users Bulletin Board

[ls7550]

Zvi Bodie approximates Options on the SPY as being around 10x type exposure. On page 18 of this PDF

compare the following two strategies: 100 percent of your money in stocks versus 90 percent of it in treasury bills or treasury bonds; and 10 percent in call options that give you more or less the same amount of upside exposure to the stock market as would 100 percent of your money in stocks.

Compare for instance (limited history as 3x haven't been around that long) 100% 1x S&P500 with 50/50 2x/bonds and 33/67 3x/bonds https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=07%2F22%2F2016&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=SSO&allocation1_1=50&symbol2=BND&allocation2_1=50&allocation2_2=67&symbol3=SPXL&allocation3_2=33&symbol4=SPY&allocation4_3=100 - generally similar

You can go back to Jan 2008 if you just compare 50/50 2x/bonds https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=07%2F22%2F2016&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=SSO&allocation1_1=50&symbol2=BND&allocation2_1=50&symbol3=SPXL&symbol4=SPY&allocation4_3=100

Zvi Bodie scales that up further - using LEAPS/Options, 10/90 10x/bonds as a proxy for 100% 1x.

For a more typical 50/50 stock/bond portfolio you might hold 5/95 Options/Bonds to similar effect (reward) as holding 100% stock, but where, assuming bonds to be safe, the maximum loss is limited to the 5% Options exposure, reduced by whatever bonds return. Into the realm of Buffett's 'Never Lose Money' type territory.

Personally I mentally put SVXY down as around a 5x. So for 50/50 stock/bond type exposure 10% SVXY, 90% bonds https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=07%2F22%2F2016&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=SVXY&allocation1_1=10&symbol2=BND&allocation2_1=90&allocation2_3=50&symbol3=SPXL&symbol4=SPY&allocation4_3=50

Yes things could go wrong, but if SVXY for instance totally failed then holding just 10% exposure to that, the rest in safe bonds, means your maximum loss is less than 10%.