As a little update to the Lazy Man Rotator I’m replacing DBC with XLB. Tomorrow we’ll look at the top 10 holdings of each ETF but for now we just examine the option chains for these two ETFs and note that DBC’s beta is .76 while XLB’s is 1.25. DBC is a basket of futures contracts while XLB is a basket of stocks, hence the beta differential. Utilizing the net price for each ETF (DBC or XLB) as a Lazy Man component yields essentially identical returns in the model. Where things get interesting is when we use XLB and DBC options as the trading instrument for the Rotator in lieu of the ETF itself.
Adopting an all option Lazy Man model with the same underlying ETFs effectively multiplies the net return by a factor of 3. For our backtest we used options at least 5% out of the money with at least 3 weeks of premium remaining. The option positions were adjusted each Friday accordingly to assure at least 3 weeks until expiration. A quick look at the Call spreads shows why XLB is the clear choice on several counts. Most obvious is the skew in open interest and this skew becomes most apparent when comparing the bid/ask spread……02-.05 for XLB and .10 to .25 for DBC. It’s tough to make money on short term options with the DBC size spreads so XLB is our new material sector proxy. For our real money model we typically sell puts to create a Long position . . a strategy that is equivalent to a covered call and which assumes the trader has sufficient capital to accept a position if put to him.
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