Barbells - Useful for More Than Just Getting Ripped 🏋️🏋️

Happy Monday!

Market Update: Last week ended slightly lower for the S&P500 (-.30%), after mixed inflation reports on Wednesday and Friday. While the market ended with such a small move, getting there was a wild ride. The S&P volatility index, the VIX, jumped nearly 20% on Friday alone.

What does all of this mean? Well, the experts are now suggesting a slightly larger expected move, positive or negative, for the next month. As I have pointed out before though, nobody knows anything about what is coming! Experts love to put a story on what happened, but no one can predict the future, even on the shortest of time horizons.

This Week’s Strategy Breakdown: The Barbell Strategy

This week, we are going to take a deep dive into the barbell strategy. This was popularized initially by Nassim Nicholas Taleb, Mark Spitznagel, and their hedge fund, Universa.

I am building this out because I see a lot of misconception on how to put this strategy in play. We will cover what the strategy is, how it works, and why we put it on below!

What Is The Barbell Strategy?

The barbell strategy is a very simple strategy and can be broken down as follows:

1. Purchase Outside of the Money Puts (7.5% of your portfolio) - roughly 15% below current market prices

2. Purchase Outside of the Money Calls (7.5% of your portfolio) - roughly 15% above current market prices

3. Purchase Bonds or a Bond ETF (85% of your portfolio)

How does the strategy work?

This strategy is great for a few reasons, and is changing the way I trade! The bonds you hold will provide a stable return, especially in today’s environment. This will more than fund your option positions. While this is nice, our goal is not a slow, stable return. We are waiting for a crash - Higher or lower. The selected puts can be purchased for $600-700 and a move in your favor will pay off well into the 5 or even 6 figure range. We purchase far out of the money puts and calls (as many as our 10-15% allocation allows) because of the exponential potential payout for each contract we hold.

Why doe we play this game?

This strategy goes against human psychology. Your fear of loss can cause you to give up after a few iterations on this strategy. You MUST be willing to sacrifice time and time again in order to finally be right. However, being right even once can be life changing. The Universa fund played this to the tune of a 4000% return in 2020.

It is said that if you missed the best 10 days of trading (as of 2019, here) in the past 20 years, your return is cut in half. Miss the best 20 DAYS, and you are net negative over the past 20 YEARS. The barbell strategy is built on waiting for a major black swan event, up or down. When that day happens, you will far out earn all of your losses.

Conclusion - Patience Pays off

As long as you are willing to take the small, consistent losses, this is a splendid strategy. If you are less patient and don’t want to lose out on smaller market returns in the meantime, you can always purchase the puts while otherwise staying invested in the S&P500 or your favored index. At the very least, for those of you worried about a market crash, these puts will offset the effects of a market collapse on your portfolio. In a world where you cannot possibly predict the future, protect yourself!

Have a great week,

Ryan