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!

  • 3
    $\begingroup$ There are futures on gold, on tbonds and on stocks, these might be a simpler (and perhaps cheaper) way to achieve leverage than options. With less worry about implied vol and where the strike should be. $\endgroup$
    – nbbo2
    Dec 19, 2017 at 20:07

2 Answers 2


I can see the genius is your investment thesis. I looked at the probability analysis in TOS and found that it is highly unlikely that the above options will go OTM on Jan 2019. Which means, this is the best alternative to a surefire bet. A leveraged bet at that.

As for your concerns, dividends are priced into options anyway and if you are concerned about rebalancing, why not try shorter duration options rather than LEAPs like you have mentioned above. The 5% upfront cost seems too minuscule compared to the returns possible using this method.

However, I can see a possible flaw in the above method which is, implied volatility. If it is very high you might end up paying a large upfront cost to put up the trades. But its all captured in the extrinsic value so if I were you I would like to keep my costs down to a set percentage.

By the way, the spread cost is 7.94 and not what you mentioned when I calculated it with your own numbers.But that is just my $0.02 and not investment advice. I do like your thesis. Many would now suggest using futures instead of options but I would say that with futures you can't limit your drawdown to 20% of the portfolio as you can with options. Implied volatility is an issue though.

I can now suggest that you can be better served to use longer term options but, not necessarily LEAPs, and rebalance long before expiration. That way, losses seems to go down.


Consider regular selling of puts rather than purchasing options. This way you don't lose money due to time decay. You have to do more transactions to achieve good returns, but I believe the strategy is worth it.


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