What is the essence of the LAIF strategy
Mikhail Portnoy
Oct 14, 2024The basic tool of the LAIF strategy is weekly options on the Nasdaq 100 index. Its working model resembles the business model of an insurance company. Market participants buy options mainly for hedging risks; in other words, to acquire a kind of insurance, primarily against market downturns. In this process, we act as the insurance company, selling these insurances, offering them for a very short term — only five days — and with an extremely low probability of an 'insurance event' occurring.
The probability of an 'insurance event' — that the market will fall below the option's strike price at the time of expiration — is minimal, about 0.3%. In other words, the probability of making a profit on each position weekly is approximately 99.7%. The main idea of the strategy is to minimize risk almost to zero and under these conditions strive to sell the selected options at the highest possible price.
Insurance buyers are those who want to protect themselves from downturns to 'sleep peacefully.' Therefore, they are willing to pay for their peace of mind, often much more than the fair value of this 'insurance,' and significantly overestimate the probability of an 'insurance event' occurring. Thus, a market inefficiency is formed, which we can systematically exploit using a complex mathematical apparatus, a deep understanding of market microstructure, and extensive options trading experience to generate stable income.
The main advantages of the LAIF strategy as an investment product are its stability and predictability of results. It has been successfully operating for more than four years, and during this time, 100% of the weeks have been profitable. Additionally, the weekly liquidity of the strategy is also its distinctive feature. Positions are held for no more than five trading days, options expire on Fridays, and the strategy fully exits to cash over the weekend, which, firstly, protects the strategy from any negative events that may occur over the weekend, and secondly, allows investors to submit applications for deposits and withdrawals once a week. We have noticed that the weekly liquidity of the LAIF strategy and the exit to cash every weekend attract investors as much as its profitability and stability.
Why this is important
Precisely because of its stability and predictability, as well as its extremely conservative risk profile, many of our investors use the LAIF strategy as a more profitable alternative to deposits and short-term government bonds.
