Download rainbow trading corporation spyglass trading. lp

SPYGLASS TRADING, L.P.
RISK-ADJUSTED RETURNS
&
MANAGING VOLATILITY
TRADING MODEL
• 90-95% of trades are in options
• Most opening positions are selling option wings
expiring in the spot month
– Routine and systematic in equity names we know
– Also sell some index options
– Expectation is for option to expire worthless
• Some short term trades using long index options
or long put or call equity spreads
• May execute long or short positions in stock
BENEFITS
• Large cash credit balances
• Creates lower cost of capital for stock
positions
• Increased return in a range bound or
gradually trending market
• Do not have to be exactly right to profit
• Required to frequently re-evaluate portfolio
CONSEQUENCES
• Event risks, e.g. mergers or crises
• Substantial directional moved based on skewed
market psychology
• Lost profit when directional bias is correct
• Potential loss in any given position can
significantly exceed potential gain
• Highly intense, requires constant monitoring, and
may generate higher trading costs
RISK ADJUSTED RETURN
STRATEGIES
• Selling the wings
• Covered writes to exit long or short stock
positions
• Converting to strangles
• Diversification
SELLING THE WINGS
• Assumes same risks as covered write
position
• Requires less margin
• Eliminates need for market movement to
make money
• Sells in spot month only
– Lessens time window for negative events
– Increases return based on premium decay rate
COVERED WRITES
• Used solely as an exit strategy for long or
short stock positions
• Sell in-the-money puts against short stock
or in-the-money calls against long stock
• Benefits:
– Forces elimination of the position within weeks
– Captures additional gain up front
– Reduces some risk of a directional change
CONVERTING TO
STRANGLES
• Opening position in a stock or index of a
short put or call
• Later add a short of the opposite option
• Little to no additional margin required
• Risk needs to be low to be effective
DIVERSIFICATION
• Large number of different positions
• Have to sell both puts and calls
• Trade in a variety of unrelated market
sectors
• Utilize index options
• Carry bonds, bond funds, reits, and listed
funds to add stability; i.e., reduce overall
portfolio risk
MANAGING VOLATILITY
• Roll
– Same month if time and premium at desired strike
– Calendar if late in month
• Buy long spread
– Spreads in out months
– Buy same strike, sell next strike
– Ratio
• Buy or short sell stock
• Sell in-the-money offset option
• Taking advantage of volatility – an earnings play
Final Thoughts
• Technical versus fundamental
• Time and labor intensive approach
• Has the potential to under perform in
strongly trending markets
• Greatest risk is being out of the market