Liquid Strategies Insights & Commentary

Market Bottoming Process

Author: Shawn Gibson

 

Given the high level of uncertainty regarding COVID-19, it is impossible to estimate what the final market bottom will be. The final low water mark will be a function of a number of factors, including, but not limited to:

1) The availability of widespread rapid testing

2) The development of treatments for patients having an adverse reaction to the virus

3) The timing of businesses reopening to once again allow consumer spending

4) The magnitude of financial and fiscal stimulus to provide relief to our citizens and businesses that are struggling during this shutdown

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Topics: Overlay

Times Like These

Author: Adam Stewart

 

As the great 21st century philosopher Dave Grohl says, “It’s times like these you learn to live again, it’s times like these you give and give again, it’s times like these you learn to love again, it’s time like these time and time again”.

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Topics: Overlay

Overlay in a Black Swan Event

Author: Justin Boller

 

We often get asked how our overlay strategy might behave in a black swan event.  Well, no time like the present to review our standard answer to this question and see how it’s holding up in reality.

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Topics: Overlay

COVID-19 Update

Author: Shawn Gibson

 

Liquid Strategies is monitoring the spread of the COVID-19 outbreak, also known as coronavirus. We take seriously the health and well-being of our employees, clients and associates.

While there is currently no health or safety concern within our firm, we want to make sure you are aware that we are taking every precaution necessary. In the event there is an outbreak in our area, we have an emergency plan of action in place that would enable our portfolio team and staff to work remotely and continue to manage all client portfolios.

In light of the historic market volatility that has accompanied this outbreak, we want to update you on the actions we have taken and will continue to take for our overlay strategy. First, and most importantly, our thoughts and prayers go out to the families directly impacted by the coronavirus, both now and in the future. 

The extreme level of uncertainty and fear that has gripped the globe from a health perspective has spread to the global financial markets. Just as health officials are struggling with quantifying the impact of the pandemic, investors are faced with the impossible task of determining the potential financial impact of the virus on all businesses across all sectors and of all size. As such, it is impossible to know how to properly discount future corporate earnings, and therefore how to discount stock prices accordingly. It may take quarters or possibly even years to be able to look back and know the “right” discount of stock prices. This extreme uncertainty around future earnings has driven equity volatility to extreme levels not seen since the global financial crisis and near the worst that we have seen in our careers. This extreme volatility validates risk management as the top priority for our overlay strategy rather than return maximization. The primary elements of our risk management process are 1) defined risk through the use of constant hedging and 2) exposure management driven by our volatility risk model. All our positions have offsetting hedges which set clearly defined maximum losses for each position, protecting the portfolio against the type of gap moves down that have occurred over the past two weeks. These protective hedges proved to be a crucial line of defense during the drawdown. As an additional line of defense, we closely track equity volatility to identify periods where equity volatility is accelerating rapidly, a condition that is unfavorable to most strategies, not just the overlay strategy. Our risk model began to indicate high levels of market risk on February 24th and has remained in that condition since. This led us to reduce and then eventually close all of our overlay positions, providing another crucial backstop during this period of extreme volatility. The net result is, with losses in the equity markets now approaching 25% from the peak, the overlay strategy has lost less than 2.5% during this period. 

It is impossible to positively determine when and at what level the market will find a short-term bottom, let alone a long-term bottom. Until there is more clarity and volatility subsides, we will continue to execute our strategy with caution by continuing to focus on preserving capital while prudently adding new positions that can benefit from the extreme negative sentiment. 

As always, we are happy to visit with investors anytime to share our thoughts on the current environment.

Sincerely,

Brad Ball, Shawn Gibson, Adam Stewart and Justin Boller

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Topics: Overlay

Demystifying the "Fear Index"

Author: Shawn Gibson

 

The CBOE S&P 500 Volatility Index (the “VIX”) was given the label as the “Fear Index” decades ago even though most investors do not understand what the index represents or why it was given this nickname. In laymen’s terms, the VIX roughly reflects the expected volatility of the S&P 500 Index over the next 30 days, expressed in annualized terms. 

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Topics: Overlay

Navigating Uncertainty in Fixed Income

Author: Justin Boller

The Federal Reserve has indicated both through their actions (lowering the Fed Funds Rate three times in 2019) and through their commentary that they intend to keep rates relatively low in the near-medium term. While this is intended to be accommodating to the economy, it poses a challenge for institutions and individuals seeking to generate distributive income through their investments.

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Topics: Overlay, ETF, Fixed Income

COVID-19 & Its Effect on the Market

Author: Megan Delaney

 

Since January, China has been in the grip of the COVID-19 (coronavirus) outbreak. What started as a flu like virus in the Chinese city of Wuhan quickly spread, and at the time of this blog post there were over 75,000 confirmed cases and over 2,000 deaths. While this strain of coronavirus is not necessarily considered a death sentence, it is highly contagious and has quickly spread amongst the population, reaching into over 30 countries including the United States. The virus currently shows signs of up to a 24-day incubation period and carriers can be contagious even before they begin to show symptoms. As it spreads to different continents and countries, what does this mean for the global market?

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Topics: Overlay

Overlay Shares ETFs Cross $200 Million in Assets Since October Launch

Author: Megan Delaney

 

ATLANTA—February 18, 2020 —Liquid Strategies, the parent of Overlay Shares exchange-traded funds (ETFs), announced today the recently launched ETF “Ovals” have surpassed $200 million in assets under management since they began trading on the NYSE Arca in October. Access to overlay strategies has traditionally been reserved for ultra-high net worth individuals and institutions through separate accounts. Ovals are breaking down those barriers by packaging index ETFs with an active overlay focused on enhancing income into an easily accessible investment option for all investors.

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Topics: Overlay, ETF

ETF Liquidity

Author: Adam Stewart

 

ETFs trade like stocks with market makers posting quotes on various exchanges. Much like stocks, ETFs can be bought or sold throughout the day. Many investors express concern over perceived illiquidity of smaller or newer ETFs. They see an ETF that might have volume of only a few thousand shares per day and trade with extremely wide spreads. A major difference in trading stocks and ETFs is the create/redeem process. 

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Topics: Overlay, ETF

Put Writing as an Income Overlay

Author: Shawn Gibson

 

In a previous blog post (What is an Overlay?), we discussed how investors who utilize overlays do so with the goal of reshaping the potential investment outcomes with the most common goals being:

  1. Generating supplemental income/return (typically through covered call or put writing strategies
  2. Reducing the risk of the existing portfolio beta exposure (typically through collar strategies)

For investors seeking additional income, it is our belief that the best way to achieve this outcome is through a disciplined put spread writing program that provides investors with a relatively conservative stream of income that supplements the income/total return of the assets in the underlying.    

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Topics: Overlay, Theta Income, Volatility

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