Profiting with Synthetic Annuities: Option Strategies to Increase Yield and Control Portfolio Risk

Overview

“For years, academics and investors have been aware of the limitations of so-called Modern Portfolio Theory (MPT). Absent an obvious alternative, many continue to apply MPT, presumably unaware of a superior alternative. In an ambitious effort, Michael Lovelady demonstrates a better way to minimize downside portfolio risk while achieving higher risk-adjusted yields. Lovelady does not dismiss MPT but blends it with quantitative investing to fill the void between theory and reality through his skillful development of synthetic annuity strategies.
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Profiting with Synthetic Annuities: Option Strategies to Increase Yield and Control Portfolio Risk

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Overview

“For years, academics and investors have been aware of the limitations of so-called Modern Portfolio Theory (MPT). Absent an obvious alternative, many continue to apply MPT, presumably unaware of a superior alternative. In an ambitious effort, Michael Lovelady demonstrates a better way to minimize downside portfolio risk while achieving higher risk-adjusted yields. Lovelady does not dismiss MPT but blends it with quantitative investing to fill the void between theory and reality through his skillful development of synthetic annuity strategies. While there are no panaceas in life, synthetic annuities seem to offer a significant improvement over conventional wisdom.”
--Donald M. DePamphilis, Ph.D, Clinical Professor of Finance, Loyola Marymount University; and author of Mergers, Acquisitions, and Other Restructuring Activities, Sixth Edition

“The author brings together the best of both the options and stock worlds in this very practical book. Smarter than most hedge funds, he spells out specific strategies and how to deal with inevitable problems. Unlike most fluff trading books, you’ll know what you are doing and why you are doing it. By the time you are done, you will definitely reevaluate the strategy behind your own portfolio. What more can you ask for in any book?”
--Michael Benklifa, author of Profiting with Iron Condor Options, President of Othello Consulting

“Michael Lovelady explains a range of options strategies in a concise and clear manner to help you rethink your approach to risk and timing, and to the overall market as well. Michael shows why options should not be relegated to trading accounts, or the 5% to 10% normally allocated to alternative investments, but have an important role to play across all aspects of the portfolio. A creative new take on investing presented in a series of visuals accessible to anyone interested in new ideas: Excellent!”
--Michael C. Thomsett, author of Options Trading for the Conservative Investor

Options-based “synthetic annuities” give investors the ability to generate higher returns, provide better downside protection, and utilize risk more efficiently than pure stock and bond-based portfolios. Now, this strategy’s creator shows exactly how to use them to support a wide range of trading and investing goals.

Hedge fund manager Michael Lovelady shows how synthetic annuities blend the best features of traditional portfolios with the risk management discipline of quantitative investing, increasing current yields while also reducing volatility.

Michael presents this new strategy with unique graphics and simplified models that any investor or trader can use, and demonstrates its value in the context of today’s key market trends. He illuminates the entire “ecosystem” of theories, products, and tools surrounding synthetic annuities, and shows exactly how to integrate them with other investment and portfolio management techniques.

If you’re a conservative investor...
...this book will help you reduce volatility and increase returns

If you’re an aggressive investor...
...it will help you structure positions with targeted yield and risk

If you’re responsible for portfolio policy decisions...
...it will help you navigate the gap between traditional and emerging strategies

If you’re an experienced options trader...
...it will help you think beyond named strategies to goal-based structures

If you trade accounts with strict prudence requirements...
...it will give you new flexibility without compromising safety

Whoever you are...
...you’ll learn powerful, new ways to think about and profit from options!

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Product Details

  • ISBN-13: 9780132929110
  • Publisher: FT Press
  • Publication date: 7/11/2012
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 272
  • Product dimensions: 6.20 (w) x 9.10 (h) x 1.10 (d)

Meet the Author

Michael Lovelady, CFA, ASA, EA, is the investment strategist and portfolio manager for Oceans 4 Capital Group LLC. Michael designs and implements reduced-volatility and theta-generating hedge fund investment strategies. He developed the “synthetic annuity” (SynA) and uses it extensively in portfolio management.

Prior to founding Oceans 4, Michael worked as a consulting actuary for Towers Watson and PricewaterhouseCoopers. Much of his work was related to design issues at a time when many employers were moving away from traditional defined benefit plans. Michael worked with clients to consider and implement alternatives ranging from defined contribution to hybrid DB/DC plans. His experience with retirement income strategies, from both the liability and asset sides, has given him a unique perspective.

Michael has also been involved in teaching and creating new methods for making quantitative investing more accessible to students, trustees, and others without math or finance backgrounds. He developed the investment profile--a graphical representation of investments and the basis of a simplified option pricing model, and visually intuitive presentations of structured securities.

Michael has served various organizations, including Hughes Aircraft, Boeing, Global Santa Fe, Dresser Industries, the Screen Actors Guild, The Walt Disney Company, Hilton Hotels, CSC, and the Depository Trust Company. He is a CFA charterholder, an Associate of the Society of Actuaries, and an ERISA Enrolled Actuary. He currently lives in Los Angeles.

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Table of Contents

Preface viii Chapter 1 Introduction 1
Chapter 2 Synthetic Annuity Design 25
Chapter 3 Tracking Performance 53
Chapter 4 Covered Synthetic Annuities 69
Chapter 5 Managing a Covered Synthetic Annuity 99
Chapter 6 Generalized Synthetic Annuities 127
Chapter 7 Managing a Generalized SynA 151
Chapter 8 Synthetic Annuities for High-Yielding Stocks 169
Chapter 9 Synthetic Annuities for the Bond Market 183
Chapter 10 Synthetic Annuities for the Volatility Market 207
Index 225
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