Leveraging Early Bull Market Exposure: A Strategic Framework for Options-Based Conviction Trades¶

Date: September 11^th, 2025
Author: Daniel Shanklin
Tags: Options Trading, Portfolio Management, Bull Market Strategy

TL;DR¶

• Opportunity: Leverage early bull-market moves using systematic options framework (case: KWEB China internet exposure)
• Challenge: Maximize upside participation while containing risk and optimizing capital usage
• Solution: Decision tree framework linking conviction levels to instrument selection + quantitative analytics suite
• Ask: Approve pilot build-out to institutionalize systematic capability by Q1 2026

Three Decision Frameworks¶

Framework 1: Determining Market Regime Dominance¶

Before assessing individual opportunities, determine whether macro or micro factors are driving markets:

Regime Assessment Questions	Macro Dominance Indicators	Micro Dominance Indicators
Are asset correlations high or dispersed?	Correlations >0.7 across assets	Correlations <0.4, sector dispersion
Is volatility elevated?	VIX >25, policy uncertainty	VIX <20, stable environment
Are Fed/policy changes imminent?	Rate cycles, QE shifts	Steady policy, focus on data
Is sector performance dispersed?	Sectors moving in lockstep	Wide sector performance gaps
Are earnings driving individual moves?	Earnings reactions muted	Strong earnings reaction dispersion

Regime Implications: In macro-dominant periods, focus on policy shifts and asset allocation. In micro-dominant periods, emphasize security selection and fundamental analysis.

Sample Assessment (September 11, 2025) - Perplexity AI Analysis:

Assessment Question	Perplexity Reading	Interpretation
Asset correlations	Cross-asset correlations low-moderate; S&P/bond correlation recently flipped negative but not extreme	Micro signal - Assets moving independently
Volatility level	VIX at 15.35, well below 20 threshold	Micro signal - Stable risk environment
Fed policy changes	70-80% probability of 0.25% cut Sept 16-17, but no dramatic shifts expected	Mixed - Some uncertainty, but manageable
Sector performance	Wide performance gaps across sectors, not moving in lockstep	Micro signal - Sector fundamentals matter
Earnings reaction	Strong earnings reaction dispersion, individual results driving stock moves	Micro signal - Company fundamentals driving prices

Perplexity Conclusion: Currently in a micro-dominant regime - Focus on security selection and fundamental analysis rather than macro positioning.

Note: This demonstrates the framework application using one AI's market assessment. Portfolio managers should triangulate across multiple analysis sources (ChatGPT, Claude, human research) before making regime determinations.

Coming Soon: - ChatGPT Assessment - Alternative market regime analysis - Claude Assessment - Cross-validation of regime indicators
- Grok Assessment - Additional AI perspective on market dynamics

This regime assessment framework can be run weekly to monitor shifts between macro and micro market dominance, enabling dynamic strategy adjustments.

Framework 2: Establishing Data-Backed Conviction¶

Strong conviction requires convergence across multiple independent information sources. Technical signals (breakouts, support levels) provide timing evidence. Fundamental catalysts (policy changes, earnings acceleration) create structural reasons for moves. Market structure data (option flows, positioning) reveals whether the opportunity is contrarian or crowded. When these elements align and point in the same direction, conviction builds systematically rather than through intuition.

Core Assessment Questions	Signal Type	Possible Answers	Impact
Is technical setup confirming or breaking down?	Technical	Confirming / Neutral / Breaking	Strength of Indicator
Is volume supporting the move?	Technical	Yes / No	Strength of Indicator
Are fundamentals improving or deteriorating?	Fundamental	Improving / Stable / Deteriorating	Strength of Indicator
Is catalyst timing near-term or long-term?	Fundamental	Near-term (≤3mo) / Medium-term (3-12mo) / Long-term (1y+)	Time Horizon
Is current regime holding?	Market Structure	Holding / Transitioning / Breaking	Time Horizon
Is positioning crowded or contrarian?	Market Structure	Crowded / Neutral / Contrarian	Strength of Indicator
Are option flows bullish or bearish?	Market Structure	Bullish / Neutral / Bearish	Strength of Indicator
Is volatility elevated or compressed?	Market Structure	Elevated / Normal / Compressed	Time Horizon

Example 1: China Internet Rally Setup "Chinese internet stocks keep bouncing off their moving average support—each time with less selling pressure. Beijing has clearly shifted policy through three announcements this month, signaling the regulatory crackdown is ending. Most telling? Investors are still betting against these stocks through options while big institutions stay underweight. When you have technical support, policy change, and everyone positioned for more downside, that creates real opportunity for outsized returns."

Example 2: Energy Sector Rotation "Energy stocks just broke through six months of resistance on heavy trading volume—this looks like the real thing. Oil refiners are making huge margins because they can't expand capacity fast enough to meet demand, yet most people are missing this profit surge. Meanwhile, energy companies represent only 4% of the S&P 500 despite oil at current levels. We're seeing both a technical breakout and fundamental value discovery while most investors are still avoiding the sector."

Framework 3: Converting Conviction to Trade Expression¶

Once conviction is established, instrument selection should match confidence levels and time horizons:

Conviction Level	Time Horizon	Primary Strategy	Capital Allocation	Risk Profile
Low	Any	No Position	0% NAV	Preserve capital, avoid false signals
Low-Moderate	Any	Equity Position	2-5% NAV	Unlimited upside, -20% max loss
High	Long-term (6+ mo)	Equity + Call Overlays	3-6% NAV	Enhanced upside, -25% max loss
High	Medium-term (3-6 mo)	Call Spreads	1-2% NAV	Capped upside, -100% on options
Very High	Short-term (1-3 mo)	Call Options	0.5-1% NAV	200%+ upside, -100% on options
Any	Unclear/Mixed	Wait for Clarity	0% NAV	Avoid timing errors, reassess signals

This approach systematizes decision-making in a way that can be assessed with real P&L over time, enabling continuous improvement of both conviction assessment and trade expression methods.

The Repeatability Problem¶

Successful investment firms like Bridgewater have built their edge on repeatable decision frameworks that systematically convert conviction levels into position sizes and instrument choices. Rather than relying on intuition for each trade, they build processes that work consistently across different market environments.

During a recent portfolio review, our CIO identified the same challenge:

"What would be great is if we can find the smartest ways to press/lever exposure to early bull markets we believe in."

This question arose after successfully establishing a position in KWEB (China Internet ETF) ahead of a significant rally. The execution worked well, but it highlighted a gap: we need a systematic approach that produces consistent results rather than relying on case-by-case judgment calls. The goal is building a repeatable process for high-conviction opportunities.

The KWEB Case Study¶

Market Context: Following increased bullish option activity in major KWEB components, the question became tactical execution:

Individual names or indices?
Put spreads at gap levels?
Put spreads at 50-day moving average support?
Call options for maximum leverage?
More conventional equity exposure?
Sit tight and manage existing positions?

This real-world scenario illustrates the decision matrix portfolio managers face when conviction meets opportunity.

The Strategic Response Framework¶

Initial Prioritization Assessment¶

When presented with the tactical options analysis priority question—whether to accelerate this work ahead of ongoing portfolio risk metrics buildout—the CIO's response revealed important strategic thinking:

"No, nothing to do here. Just wanted to share a common problem for us and something I think we could be smarter about in the future."

This response highlights a crucial portfolio management principle: distinguishing between tactical execution and strategic capability building. The immediate trade opportunity doesn't require new infrastructure, but developing systematic approaches to such decisions represents significant long-term value.

The Infrastructure Response¶

The proposed analytical framework would involve:

Data Foundation: Bloomberg formulas to pull equity history and options surface data, with the richest datasets available for major indices like KWEB.

Theoretical Analysis: Payoff modeling at each equity price for different strategy types, enabling systematic comparison of risk-return profiles across tactical approaches.

Strategic Positioning Philosophy: Recognizing that being long equity represents "being long real-asset inflation (debasement) tail without capping the upside"—a positioning that supports natural long bias comfort while maintaining core thematic exposure.

Key insight: "Super-high conviction upside could be expressed with the leverage/convexity of options."

The Leverage Spectrum¶

Understanding the instrument continuum becomes critical when conviction levels vary and market timing uncertainty exists. Pure equity positions provide unlimited upside with no time decay, offering the natural long bias comfort that enables portfolio managers to maintain positions through volatility while preserving thematic exposure. However, equity positions consume significant capital relative to their leverage potential, making them optimal for core allocations rather than tactical expression of high-conviction views.

Call options represent the opposite extreme, delivering maximum leverage with clearly defined downside risk limited to premium paid. This asymmetric payoff structure makes calls particularly attractive for high-conviction scenarios with near-term catalysts, though they introduce time decay and volatility risk that can erode value even when directionally correct. The binary nature of options requires precise timing that equity positions don't demand.

Between these extremes, put spreads offer income generation with defined risk profiles that perform well in sideways markets, though they limit upside participation and involve more complex execution. Call spreads provide a middle ground, reducing the cost of call exposure while maintaining some time decay protection, though they cap upside potential and remain subject to theta burn. Each instrument serves different conviction levels and time horizons within a comprehensive leverage framework.

Strategic Insights¶

The Capital Allocation Decision¶

The conversation reveals a sophisticated understanding of portfolio construction trade-offs that extend beyond simple return optimization. Options strategies can provide asymmetric exposure with lower capital requirements, freeing substantial capital for deployment across other opportunities—a critical consideration when multiple high-conviction themes compete for limited risk budget allocation.

The degree of leverage should systematically match conviction level, with equity positions serving moderate confidence scenarios while options express high conviction paired with catalyst timing. This framework prevents the common error of applying uniform leverage across varying conviction levels, which either under-capitalizes strong views or over-risks weaker positions.

Higher leverage strategies consume more risk budget per dollar deployed but can achieve position sizing targets with significantly less capital. This creates a multiplicative effect on portfolio efficiency when properly implemented, though it requires more sophisticated risk monitoring and position management than traditional equity allocations.

The Timing Element¶

Early bull market identification requires balancing multiple information streams simultaneously. Technical signals such as gap levels and moving average bounces provide entry timing, while fundamental catalysts including policy changes and earnings acceleration define the conviction framework. Market structure indicators from option flow and positioning data reveal whether the opportunity represents contrarian value or crowded momentum, and disciplined risk management through systematic position sizing and stop levels ensures that timing errors don't create disproportionate losses.

Framework for Future Implementation¶

The systematic approach to leveraging early bull market exposure requires a decision tree that integrates conviction assessment, catalyst timing, and technical context into a coherent strategy selection process. High conviction scenarios naturally point toward options strategies for maximum leverage, while moderate conviction suggests blending equity and options approaches to balance upside capture with downside protection. Developing convictions benefit from starting with equity positions and layering in options as conviction strengthens and catalysts become clearer.

Catalyst timing creates the second dimension of strategy selection. Immediate catalysts expected within days or weeks favor call options and call spreads that can capture rapid moves, while medium-term catalysts spanning months work well with equity positions enhanced by option overlays. Long-term themes extending across quarters require primarily equity positioning to avoid the cumulative impact of time decay.

Technical context provides the final element, with support levels creating put spread opportunities for income generation, breakout levels offering optimal call option entry points for momentum capture, and range-bound markets favoring premium selling strategies that benefit from volatility compression.

Capital allocation guidelines must address risk budget allocation by determining what percentage of portfolio risk can be dedicated to high-conviction themes, then optimizing strategy selection within that constraint. Liquidity requirements demand maintaining sufficient dry powder for additional opportunities while maximizing exposure efficiency on current convictions. Time horizon matching becomes critical, requiring alignment between option expiration cycles and expected catalyst timing to minimize the impact of time decay on position profitability.

The Broader Strategic Lesson¶

While the immediate KWEB opportunity didn't require new analytical tools, developing systematic frameworks for such decisions creates sustainable competitive advantages. The goal isn't to perfect every tactical trade, but to build repeatable processes that improve decision quality over time.

Implementation Philosophy¶

"Being long the equity is being long the debasement tail without capping the upside. That may lead to restful nights while sticking to your core theme. But super-high conviction upside could be expressed with the leverage/convexity of options."

This reflects one approach to strategic portfolio construction: matching instrument selection to conviction level while maintaining risk management discipline.

Future Development Areas¶

Analytical Infrastructure¶

Options Surface Analysis: Real-time implied volatility surfaces for trade identification
Payoff Modeling: Dynamic scenario analysis across price and time dimensions
Risk Metrics Integration: Portfolio-level impact assessment for different strategy choices

Systematic Frameworks¶

Conviction Scoring: Quantitative frameworks for assessing conviction levels
Strategy Selection: Decision trees for optimal instrument choice given market conditions
Position Sizing: Risk budget allocation across conviction-weighted opportunities

Conclusion¶

The KWEB case study demonstrates both the opportunity and challenge of early bull market positioning. While tactical execution succeeded, the broader lesson concerns developing systematic approaches to such decisions.

The key insight: build frameworks that can be repeatedly applied rather than optimizing individual tactical decisions. This approach creates sustainable competitive advantages while reducing cognitive load during high-pressure decision moments.

Future development should focus on creating analytical infrastructure that supports rapid strategy comparison and risk assessment, enabling portfolio managers to confidently deploy capital when high-conviction opportunities emerge.

Quantitative Analysis Framework¶

To support the strategic framework outlined above, we have developed a comprehensive options strategy analysis suite that explores approaches to Collin's question about finding the smartest ways to leverage early bull market exposure.

KWEB Options Strategy Analysis¶

The analytical framework includes three complementary analyses:

Basic Strategy Comparison: Systematic comparison of pure equity, call options, call spreads, and synthetic positions for KWEB exposure using Black-Scholes pricing and realistic market parameters.

Conviction	Instrument	Expiry	Capital @ Risk	50% Rally P&L	-20% Drawdown
High	32 Calls	90 days	1.0% NAV	+200%	-100%
Moderate	32/36 Spread	90 days	1.2% NAV	+110%	-100%
Core Theme	Equity	n/a	5.0% NAV	+50%	-20%

Interactive 3D Analysis: Advanced visualization using Plotly 3D surfaces to explore options pricing dynamics, volatility surfaces, and strategy performance across different scenarios.

High IV Portfolio Enhancement: Sophisticated analysis exploring "free lunch" opportunities in high implied volatility environments through volatility premium capture and correlation diversification.

Key insight: High IV environments enable portfolio Sharpe ratios of 1.0-1.5 versus 0.6 for pure equity through strategic options deployment.

Strategy Selection Framework¶

The quantitative analysis suggests potential guidelines for the tactical questions raised:

Individual Names vs Indices: Index options (like KWEB) provide superior liquidity and data richness, making them preferable for systematic strategy implementation.

Call Options for Maximum Leverage: Appropriate for high-conviction, short-term catalyst scenarios. The analysis shows potential 200%+ returns in bull market scenarios but requires careful position sizing due to binary risk.

Put Spreads at Technical Levels: Effective for income generation and sideways market protection, but limited upside participation makes them suboptimal for bull market leverage.

Capital Efficiency Analysis: Options strategies achieve higher capital efficiency (returns per dollar deployed) but consume more risk budget per position due to leverage effects.

Risk-Return Optimization¶

The analysis demonstrates that conviction level should determine strategy selection:

High Conviction + Near-term Catalyst: Call options (32-strike calls in KWEB analysis)
Moderate Conviction: Call spreads for defined risk exposure
Long-term Theme: Equity with options overlays for enhanced returns
Income Focus: Put spreads at technical support levels

All option exposures will be sized within the 2%-of-NAV VaR limit defined in the 2025 Risk Mandate.

Immediate Next Steps¶

For Portfolio Managers:

Position Review – Evaluate existing high-conviction themes for option overlay suitability by October 15, 2025
Data Build – Scope Bloomberg API pull for implied volatility surfaces; budget 20 hours QuantDev time
Pilot Implementation – Run framework on KWEB and one US thematic basket; report results at November Investment Committee

Implementation Note¶

This memo integrates strategic portfolio management thinking with supporting quantitative analysis. The complete options analysis suite provides the analytical infrastructure needed to systematically evaluate tactical choices for future high-conviction opportunities.

This analysis explores potential approaches to the CIO's question about finding smarter ways to press early bull market exposure while maintaining risk management discipline.