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17% per year is the return target (before tax).
Subtract 2-3 points for tax, 0.7 for management, 0.15 for commissions = approx 14% cash return. (Similar to pre-tax S&P for the prior 15 years - Officialdata.org)
So 150K principal would throw off ~20,250 after twelve months with no risk of loss.
Method
Total return is realized by combining a steady income strategy with an active trading strategy.
T-Bills ( 3.7% ) : The basic income method uses 1- to 3-month Treasuries. (Currently 3.7%, though constantly changing.)
Dividends ( 5.5% ) : The leveraged income method produces 5 to 5.5% – realized by harvesting dividends from equity ETFs (IVV, SPY) while eliminating movement with very deep SPX and XSP options. Index options and portfolio margin combine allowing 5x leverage. Approx one-third of returns are expected to be taxed as qualified dividends.
S&P Puts ( 12% ) : The active trading strategy uses written options on SPX expiring next-day (next session if over the weekend). This yields ~12% on average after twelve months.
So, active strategy plus steady S&P dividends yields ~17%. (In the real world, this will range from 15 to 19%.) Sometimes a Member may be eligible for 0% long-term capital gains; that year would yield them ~16% cash. When combining active trading and T-bills, yield is ~15.7%.
To get started, please message welcome@nddcap.org
Risks & Assumptions
- Main risk of T-bills is having to sell early
- Main risk of leveraged dividend strategy is the half-second gap while “legging in” to a balanced, hedged position
- Main risk of options strategy is unpredictability of returns, which range from 9 to 15%
- We assume S&P overall dividends will always be 1% or more
FAQ
What fees are applied
Management (performance) fee is between 4 and 9% of profit; usually 6%.
What is the Lockup period
Lockup period depends on the chosen strategy.
- The active S&P Puts strategy plus default interest would have a 35-day lockup
- The combo strategy using T-bills has a 70-day lockup
- For the leveraged dividends combo – Members must put in $70,000 or commit to a 325-day lockup
A Member can divide funds among the different strategies, so different lockups would apply.
This other outfit is promising 20 to 30% returns
A 25% trading return, after 25% performance fee, is about 18% pre-tax.
How is Company structured
Investors are general partners (Members) with voting rights in an LLC (Partnership).
Are international Members accepted
Yes. Just need a current ITIN.
Foreign partners must have a valid TIN (Taxpayer Identification Number), such as an ITIN, which must have been used on a return in the last three years to remain valid.
https://www.irs.gov/individuals/international-taxpayers/helpful-hints-for-partnerships-with-foreign-partners
What is the minimum net worth
$15K liquid, and $200K total (house, savings, etc.)
What is the minimum to get started
$3000 to become a Member. You may wish to risk only a modest amount for the initial year.
How big will the partnership get
Just 35 to 40 Members.
Can a Member learn the mechanics and do it on their own
Yes.
What is the dividends strategy risk profile
If the equity market split-second fell 15%, 100 unhedged shares of $690 IVV (one of the two legs) would lose $10,350. Conceivably possible, though very unlikely.
The most significant candidate for the largest drop in a short time frame is the May 6, 2010, “Flash Crash”. During this event, the S&P 500 plunged approximately 5% in a period of roughly five minutes
Another risk is uncertainty around IRS mixed straddle election and the timing of holdings; very esoteric. Additionally, the timing of dividends of SPX components diverges from the single, large dividend of IVV/SPY.
What is the options strategy risk profile
This is the world’s one brain-dead-simple options play, for various reasons, mostly the vast size of the SPX options market and the constant downside hedging of U.S. equity portfolios.
As Earlyretirementnow’s BigERN wrote:
Why does this work? Implied Volatility (normally) exceeds Realized Volatility. Of course, … theorem is useful only if the strategy has a positive expected return. Where does this positive expected return from selling options come from? In a nutshell, implied volatility exceeds realized volatility on average.
https://earlyretirementnow.com/2019/03/27/passive-income-through-option-writing-part-3/
BigERN has done this option play for 15+ years. The Manager has done it for 8 years; it works.
How does the options strategy perform in market crash
The strategy benefits from “crash” periods (bear market). (More profit is gathered.) The problem is when the market unexpectedly begins crashing. This is rare.
As BigERN wrote on the Mar.2020 Covid-related volatility:
There were a few drawdowns, but they didn’t last very long. Each down/up cycle was much faster than your average equity bear market. … 2020 started with two down months in January and February, though the March 2020 blockbuster return made up for that again. So, quite intriguingly, the early part of the 2020 bear market caused some losses, but the really volatile month of March 2020 made up for it. … the first half of 2022 was a bit choppy. But overall, this was a very successful strategy.
https://earlyretirementnow.com/options/
https://earlyretirementnow.com/2021/04/21/passive-income-through-option-writing-part-6/
(relaxing at St.Barts…)