Defined Risk Investment Process

How It Works

Invest in Equities

ALWAYS INVESTED in equities for growth via low-cost ETFs (buy & hold)

Hedge the Equities

ALWAYS HEDGED by actively managing long-term put options (LEAPs)

Seek Additional Return

Actively managing shorter-term options portfolio to help offset the cost of the hedge

When the market drops and the equity loses value, the put option increases in value, and vice-versa.

This counter-balancing investment approach is engineered to NOT lose big.

Simple and Effective.

Repeatable 3 Step Investment Process

Our unique hedged-equity approach is driven by a three-step, rules-based and repeatable investment process that removes emotions from the investment process.

The Defined Risk Strategy is uniquely Always Invested, Always Hedged.

Step 1 - Invest in Equities

Always Invested – We begin by building a core equity position and we remain fully invested at all times.

  • Consumer Directonary (XLY)
  • Communications Services (XLC)
  • Consumer Staples (XLP)
  • Energy (XLE)
  • Financials (XLF)
  • Real Estate (XLRE)
  • Health Care (XLV)
  • Industrials (XLI)
  • Materials (XLB)
  • Technology (XLK)
  • Utilities (XLU)

For example, our U.S. Large cap equity strategy is always invested in the S&P 500 via equal-weighted sector ETFs.

Step 2 - Hedge the Equities

Always Hedged – We seek to limit losses on a calendar year basis, and especially during bear markets, by purchasing longer-term put options (LEAPs), at- or near-the-money, on the entire underlying ETF portfolio. We use only longer-term puts, which offer the greatest cost efficiency and stability.

 

We maintain portfolio protection by rolling the hedge annually, so the DRS is not under duress to seek protection in bear markets.

 

Also, during significant market declines (around a 20% decline from prior hedge position), we reset the hedge by selling the deep-in-the-money put for a profit and buying a new LEAP on the portfolio at- or near-the-money. The sale of the initial hedge in such instances generates capital we then use to acquire additional equity at a market low.

Step 3- Seek Additional Return

We actively manage a shorter-term options portfolio using a disciplined, rules-based approach to help offset the cost of hedge and provide additional portfolio return.

Actively Managed, Rules-Based Trades

 

  • No options strategy works all the time. 
  • Markets are always evolving.
  • Thus, RISK is always evolving.
  • As such, an active approach is necessary.
Monitor and Adjust

Propriety software enables us to: 

  • Obtain best-execution on all trades
  • Block trade all accounts for equal, efficient, and simultaneous trading
  • Allocate trades evenly to all separately managed accounts
  • Oversee, re-hedge, and rebalance each separately managed account
  • Monitor on a daily basis:
    • Put option exposure to maintain hedge relative to equity
    • Cash flows, new investments, and equity dividends to remain fully invested

For each account, we: 

  • Rebalance equities as rules dictate
  • Re-hedge put options annually, or intra-year during large market declines as rules dictate

Rolling the Hedge 

Since inception in 1997, our unique, repeatable Defined Risk Investment process has generated consistent, long-term returns by protecting irreplaceable capital.

A Message from Founder, Randy Swan

Randy Swan discusses how the Defined Risk Strategy is designed to address the investment challenges of today and tomorrow.

Meet Swan Global Investments

Learn more about the Swan team and the unique design of the Defined Risk Strategy.

LEARN MORE