The Yield+ strategy is a proprietary option strategy that DJWS manages for clients in separately managed accounts. Clients maintain their current portfolio of investments. Options traded are highly liquid. The Yield+ strategy can also be managed in qualifying retirement accounts.
The strategy works because markets tend to trend but option markets do not take long-term price trend dynamics into account. The strategy also benefits from its ability to shift from equity exposure to fixed income exposure when longer-term S&P 500 momentum declines.
Most overlays sell volatility to generate income. These short volatility strategies tend to do very poorly during periods of extreme market moves. The Yield+ strategy is not a short volatility product. Rather, it is a cost effective overlay that sells limited loss option spreads to monetize the upward drift in the US equity market. This enables it to perform well in differing market conditions. The maximum loss on any trade is 1% of notional.
Yes! Some custodians will allow investors to run the Yield+ strategy in a retirement account.
Can you provide a little more detail on why this is different from traditional short iron condor strategies
Short iron condor strategies are expressing the view that the S&P 500 will stay in a range. They do well as long as the S&P 500 remains range bound but can do poorly during periods of extreme price moves. The Yield+ strategy uses options to trade momentum. It sells longer dated option spreads (2-3 months) to monetize the upward drift in the US equity market. It does well when the S&P 500 trends higher over longer periods of time.
Sure, Section 1256 dictates that 60% of the trade is taxed at the long-term capital gains rate and 40% is taxed at the short-term capital gain rate on the subset of trades that are executed on options on broad based indexes. Please note this is not tax advice.
While the product was designed to be very low-risk, performance could suffer if there was a significant change in correlation between US equities and US fixed income. The maximum drawdown for the Yield+ strategy based on simulated performance returns since 2008 was 5%. In addition, investors could receive cash margin calls if the strategy returns are negative (i.e., investor would need to fund a negative cash balance either by paying margin interest or by depositing cash in order to avoid liquidating any positions in the portfolio).