Year End Review

Year end return on my short vol strategy
Year end return from my personal account

2021 has been a banner year for me. It is the first year that I truly committed a large portion of my capital to the stock market. I created my first trading entity where I focused on a strict strategic direction – shorting volatility. The return was 78.87%. For my personal account I have done far better. The return was 187.43% for the year. SPY returned 25.90% for the year. So it is safe to say I’ve beat the index in 2021.

By separating my short vol strategy away from my personal account, I can see more clearly how different strategies generated different return. In my personal account, I had a lot more individual stock holdings, but most importantly, I owned a large amount of LEAPS on SPY as well as a bunch of individual stocks. A majority of those were purchased last year and most of them are set to expire in 2023.

Given I owned a lot of convexity in my personal positions, I experienced way more volatility – but at the same time, way more gains compared to the gains in my short vol account. Throughout the year, we had periods of intense volatility in which weekly changes to the S&P were going up and down 5%. The personal account endured a lot of stress but holding on proved to reap amazing returns. Max drawdown for the account was 23.33% while the S&P was 5.21%. Standard deviation was 3.53% compared to S&P’s 0.81%.

The short volatility fund, ironically, never got hit too hard despite the large swings. In fact, each big downturn created a period of strong belief that selling volatility would be safe. The irony is that when market is strong and VIX is low, selling volatility would expose you to big losses if you don’t control your risk appropriately. Max drawdown was 11.97% and standard deviation was 2.23%.

I can’t say for certain we’d have just as a strong a year in 2022. Since most people are thinking that the Fed will taper and raise rates in 2022, I think there could lie a surprise for us where 2022 can be just as strong. I will be tracking closely the bond rates and see if there are any yield curve inversion that could signal something different.

The short vol strategy would most likely continue to build up additional capital for me. At certain periods that would allow me to add more long term options to my personal account as we are getting access to options expiring in 2024. While these two strategies working in tandem would create the ideal portfolio, I’d put most of my focus on the short vol strategy as this is the strategy I’m looking to eventually launch in the future. After all, nobody gives you credit for your performance in a bull market. It is how you perform during periods of stress that proves you are truly capable.

In 2022 and beyond, I will document on this blog on a weekly basis my returns on both of my accounts. I would not be adding additional capital to my trading entity. I think that would create a clearer understanding of how I am doing. It wouldn’t be fair for me to add capital into it when it is stressed as I would kind of see that as cheating. I want the short vol strategy to perform as I intend to without outside assistance. On the other hand, I would add or subtract from my personal account as I see fit (I got a family to feed, houses to buy/sell, a bunch of liquidity needs beyond the scope of this blog). I will still be tracking it using money weighted returns but nevertheless it would probably not end up as an accurate reflection of my performance.

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