What we've done is attempt to create a delta neutral model...for those unfamiliar with the term it typically refers to a position that is simultaneously long and short an equity (or it's proxy) in equal amounts.
How do you make money with such a position? One way is by selling puts against against both sides to pick up premium decay. There's an inherent danger in this strategy and the level of that danger resides in the strike points traded....suffice to say it's quite complex and way beyond the scope of our inquiry here.
Now a logical trader would say...if you want to create a delta neutral position..just buy the equity and its inverse...SPY/SH, QLD/QID, SSO/SDS, TLT/TBT, etc.
Surprise!...none of those pairs actually produce anything near a delta neutral equity curve.
Surprise #2...what does get close to solving the problem is an odd couple balance of QQQ and SH, which over 5 years has shown a half percent net change.
One of these days some outfit like RYDEX or PROFUNDS is going to see the incredible opportunity of offering an ETF that looks just like this with an accompanying option chain. If that ever happens you could just sell calls or puts or butterflies every month, collect your money and never lose another night's sleep.
Until then it's going to take a little more work to make this thing pay out.
The scenario here suggests selling at the money calls on both sides (QQQ and SH) with 2 months time decay and then rolling the positions every 2 months for another 2 months. The relative strength ranking table alerts us if the short term DN balance may be in jeopardy.
I've broken out the dividend portion of the equation to better see the value of holding the underlying along with the options. Traders with level 3 approval could just trade the options and ignore the capital requirement for the equity positions.
There are (there always are) a couple caveats in this strategy and we'll examine those tomorrow.
