The permanent portfolio proposed by Harry Browne has had an excellent track record since the 1970's. It is able to compound at roughly 8% annually with a Sharpe ratio around 0.7.
The permanent portfolio consists of cash(shy), gold(gld), stocks(spy), and long term US bonds(tlt). A variant of this portfolio proposed by Marc Faber replaces cash(shy) with real estate(vnq). Let's use Faber's variant for the rest of the discussion.
Suppose that we believe in the underlying principles of the permanent portfolio, and would like to leverage to 2X of the capital. One way for retail investors to achieve this is by allocating 20% of the total capital on ITM options (delta = 1) with roughly 10 times leverage. The rest of the capital is just in cash earning risk free interest.
As of today (12/17/2017), the following are the quotes for the 4 etf's quotes and the corresponding ITM call options expired in January 2019.
spy: 266.51, [bid: 35.03, ask: 35.50, strike: 240, over intrinsic: 8.52, spread cost: 0.94 (0.47*2)].
tlt: 128.35, [bid:14.05, ask:14.35, strike: 115, over intrinsic: 0.7, spread cost: 0.6].
gld: 119.18, [bid:18.55, ask:19.25, strike: 107, over intrinsic: 6.37, spread cost: 1.4].
vnq: 85.12, [bid: 8.70, ask:9.70, strike: 77, over intrinsic: 0.58, spread cost: 1].
Buying 1 spy, 2 tlt, 2 gld, and 3 vnq ITM options should cost 131.8 with 24.4 over the intrinsic value (could be considered as interest for the leverage) and a spread cost of 7.54. The total portfolio is thus worth 659, with $131.8 in options and the rest in cash. The total expense for the setup is thus: (24.4+7.54)/659 = 4.8%.
While the setup's cost is not super cheap, it does provide the leverage desired assuming the options stay ITM. If one of the assets falls by too much or expiration date is within 3 months or so, rebalance will be necessary to keep all the options' delta near 1. The setup also has the nice property of having the drawdown theoretically limited to around 20%.
Under what circumstances would this setup be worth the troubles and the additional 5% costs? A few drawbacks I can see are: the lack of dividend/interest incomes with options, the rebalancing need when options become near the money, and the 5% upfront costs. What might be other concerns for such an approach? Thanks!