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CTA Spotlight:CKP Associates - LOMAX Program
June 4, 2007
Hopefully readers of this newsletter have logged into the Attain website recently and seen some of our new recommended CTA programs. Check out our list of top performers by Clicking Here. We have been busy researching these managers and performing our due diligence, and several are quite appealing across not just performance, but also what they trade, and how they trade it.
One of the most veteran CTAs on the list of new advisors is CKP Associates, and their LOMAX program. This is sort of a best of both worlds for those who are eager to trade something not associated with the stock market at all, and who like the consistency of returns seen with option selling. This month's CTA Spotlight is on CKP Associates - LOMAX Program.
Who is the Manager?
The manager of the program, and owner of CKP Associates is Swiss advisor Klaus Schatz. Mr.. Schatz started out humbly as a tool and dye maker in a machine shop, before taking the academic approach by getting a BS in mechanical engineering and MS in Chemical Engineering. Five years later, he received a Dr. Science, writing a thesis on the 'Development of Kinetic Parameters from Dynamic Measurements in an Adiabatic Tubular Reactor.'
From there, Klaus started at Mobil Oil Corp. in their New Jersey offices, staying there for entire engineering career while obtaining 38 patents which generated over $300 MM for Mobil Oil. That's not all though - his outside activities have included being a ski instructor. sailing on a merchant marine vessel, setting up a chain of French bakeries in Philadelphia, a partnership for racing horses in Kentucky, and New York Harlem Productions, a theater company that is still touring Europe and the far East.
These days, Mr. Schatz is dedicated to growing his CTA business through a simple strategy of making his clients money. He continues to research and test his market theories, while keeping American market hours to monitor his trade risk day by day.
When not working on business, Klaus is an avid outdoorsman, having climbed the Matterhorn, completed the Iron Man Triathlon, and "logging 2500 miles on my racing bike each year". Mr. Schatz lives in Switzerland.
How does the Program Work?
The program's basic strategy is to collect option premium through the sale of option strangles (selling calls and puts at different strike prices simultaneously. This strategy is the same as that employed by the popular Zephyr, Ace and Zenith Diversified programs at times - but there is one BIG difference. CKP stays away from the stock index markets - and instead concentrates on traditional commodity markets.
Looking at Corn and Crude Oil instead of the S&P 500 makes CKP more like the popular FCI than the aforementioned CTAs. But unlike FCI - CKP specializes in strangles, or Call and Put options sold at different strike prices above and below the predicted trading range.
This is called an option strangle, as you don't want the market to go outside of the area you are "strangling" with your calls on one side and puts on the other. In the words of manager Klaus Schatz - " This is really like building a window around the ever fluctuating commodity price, where my only task as a CTA is to make sure the price does not "jump out of the window"."
But anyone could sell strangles on different commodity markets - what sets CKP apart is their method of entering and exiting the strangle positions. On the entry side - before picking a market to sell options in, thorough analyses of the fundamentals, charts and a set of eight indicators are carried out. Markets are analyzed for suitability of option trading and allocation of funds for the different markets is determined (with an eye towards a balanced portfolio of positions without too much exposure in any one market or sector).
Then the monthly profit target and the number of contracts in each commodity are selected. The number of options traded of a particular commodity is based upon various factors including the target profit percentage for the current month, and further by margin requirements, volatility, liquidity, and trend behavior of the underlying commodity. Margin to equity ratios for the program generally run between 30% and 50%.
Finally - the entry points and strike prices (window) are set. The sizing of the "window" (the difference between Call and Put strike prices) is an optimization process based on the potential profit of the strangle. Typically, the potential profit decreases with increasing height (the difference between the strike prices of the call and the put) of the spread and with decreasing width (time between entry and exit) of the position. There is an inverse relationship between the profit target and the probability of attaining it; and CKP has developed a probability correlation from which the profit target can be optimized.
So the the taller and the narrower the window - the lower the premium, and vice versa. To obtain a certain monthly result one can sell a few wide and low windows in a few markets, or one can sell many tall, narrow windows in many markets. The latter has a much lower risk and a higher probability of success in CKPs opinion, and they therefore concentrate their efforts on such "windows"
On the exit side, the profit target is the expiration of the options contract. But not all options expire worthless - and CKP rolls or covers positions if the underlying commodity moves to a critical proximity relative to the strike price of the options. CKP looks predominantly at short range technical factors and patterns that affect the commodity prices over the near future.
April 1st: June Euro Currency Futures market price = 1.3459
|Sell 2 June EC 139 Call @ $0.09 = Credit of $225.00|
|Sell 2 June EC 131 Put @ $0.12 = Credit of $300.00|
Total Credit of $225.00 + $300.00 = $525.00
June 1st: June Euro Currency Futures market price = 1.3497
|Both the Calls and Puts Expire Worthless, effectively buying them back at $0|
|Gain on Trade = $525.00 Credit - $15 commission*4 = $465.00|
$465.00 = +0.47% on $100K minimum investment.
While February 27th is probably a distant memory for most people now that the major US stock indices are all back at record highs - the lessons of that day when S&Ps sold off more than 4% should be remembered. Stock index option selling CTAs took a hit - and the phones were ringing off the hook with people saying they wanted CTAs not correlated to the stock market.
Well - we said it then, and we'll say it again now. The easiest way to make sure you're not correlated with the stock market is to not trade in it. And that's what we like most about CKP - their diversification profile and exposure to non stock index markets in the grains, metals, currencies, and more.
One other thing CKP does which most other advisors don't is a weekly update showing which positions the program is in, whether the trades are in the green, orange, or red zone of the trade window, and commentary on where they believe each market is headed with regard to their positions. It's refreshing to see just how on top of each market and position CKP is in these weekly reports.
Another unique feature is CKP's use of target returns. Not content to merely get what market gives him - CKP has target monthly, quarterly, annual return numbers - and targets trades to hit those numbers. You can ask him at any time to see the actual returns of the program overlaid on the target returns. This gives a nice image of where you are supposed to be, and whether the manager is providing the returns you expect.
At the end of the day, what we like about CKP is their focus on a diversified portfolio of commodity (non stock index) markets. While this may seem like a good thing just because it keeps an investor away form the dangers of a stock market market crash - we actually like for a different reason - because it allows the program to sell options on any market which is showing high volatility and a favorable risk/return profile. Contrast this to to other option selling CTAs who sell options on the S&P 500 only.
These stock index option sellers live in constant fear of a sell off like we had in late February - which can mean big short term losses. But CKP actually looks for such moves in other markets - then sells into that high volatility. So instead of taking whatever volatility one market will give, and fearing a spike - they take the volatility they want from any market, hopefully after the spike has already happened. This is a unique approach, and one that has provided steady gains over the last 4+ years.
- Barbara Mueller
IMPORTANT RISK DISCLOSURE
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Stocks continued their worldwide rally in May as investors in the US, Europe and & Asia continue to be very bullish. Most of the growth can be attributed to the worldwide merger and acquisition trend. It seems like every morning either the Wall St. Journal or CNBC is breaking another big deal and whether it is banks or soft drinks the market cannot get enough consolidation. This consolidation phase will have to end sometime - or else we'll just have one really big company.
For the month SP futures climbed +2.99%, NASDAQ futures were up +2.82%, Dow futures rallied +4.07%, Russell 2000 futures gained +3.61%, and SP Midcap futures climbed +4.50%. This rally sure looks like it is running out of steam, and with the Chinese market looking like it might be turning over (-8% last night), short term bond yields rising, and the US housing market still on shaky ground - the sell off may happen sooner rather than later.
Part of the global stock rally can be attributed to lower energy prices as Crude Oil futures fell -5.09% in May. Natural Gas futures (-0.86%) and Heating Oil futures (-1.19%) also moved lower for the month. RBOB Gasoline futures were up +2.08% for the month but they did pull back considerably off their intra-month highs.
In commodity trading grains had a huge month with Soybean futures rallying +8.51%, Corn was up +5.55%, and Wheat shot up +4.34%. Softs also had a big month with Coffee gaining +5.42%, Cotton was up +3.63%, and Sugar gained +2.64%. Other markets of note include Live Cattle which climbed +2.41%, Gold which lost -3.32%, and High Grade Copper which fell -4.53%.
Finally in currency & bond trading the Dollar Index gained +1.17%, the Euro fell -1.56%, the Yen was down -2.17%, while the Canadian Dollar rallied +3.63%. In the bonds the US 30 year bond futures were down -2.35% and 10 year note futures fell-1.82% in May.
***Commodity Trading Advisors (CTAs)***
May was an example of the good times for most CTA investors - with a large percentage of mangers turning a profit!!
Topping the list was Dighton Capital USA, which returned close to +40% - yes +40%, but before you get too excited, it is important to note that they were down -33% in April. By design, Dighton initiates an initial position and then builds on that position as the markets move against the expected trend. Dighton has a 56% average annualized return with a historical 35% month end drawdown.
In addition to the above, Stock Index Options Sellers posted a stellar month as market volatility continued to erode as the market crawls higher. Crescent Bay earned aprox 8%, Zephyr Aggressive and Moderate both gained close to +6.5%, Raithel Investment gained just over 5%, and several other mangers including Zenith, BC Capital, and Diamond earned aprox 2%. Most of the above are rough estimates; however you can continue to check our website for updates over the next few days (http://www.attainaccess.com/cta).
Elsewhere NDX Capital jumped back into the market for the first time since February and successfully turned a profit for the month– according to the manger the positions consisted of a 10% position. As the risk reward profile of the Agriculture and Grain markets begin to settle back to normal we can expect to see the position sizing increase.
***Day & Swing Trading***
U.S. equities continued on the path of least resistance in the month of May towards all-time highs. The advances in the stock market kept volatility significantly lower than levels seen in late February of this year, generally benefiting the swing systems but holding back the day trading systems. Swing trading systems that favored the long side tacked on gains while those that attempted to call the top found themselves in hot water on their short positions. For the day trading systems, finding entry points was often very difficult with several large daily moves occurring in overnight trading - but some were able to pick their spots wisely and finished the month deep in the black.
Of the aforementioned swing systems that were profitable in May, Adaptive Euro Index was the top performer with gains of +$2,296.34. The pattern for the system’s success in May was to wait for a small pullback in foreign equities and enter long inline with the predominant trend the following day using a small profit target and large stop loss. Tzar ES held long for the entire month and tacked on +$2,225 in open trade profits putting the trade up just short of 100 points (+$5K). Tzar NQ hasn’t benefited from the long trade as much as the ES but still tacked on a respectable +$1,015. Tzar eRL reversed short late in the month after being down on the long trade for several weeks and made +$1,990 including the losses on the current short position.
Bounce eRL had some activity in May after the Russell 2000 experienced disproportional declines compared to the eMD market. The system profited +$741 on three trades, all of which were winning long trades (Bounce is long only). SeasonalST ES and eRL both finished in the red with losses of -$625 and -$1,840 respectively. Mesa Notes continues to hold long in the Ten Year Note as it makes new lows and lost -$1,987.50 in open trade equity. If history repeats itself, look for the program to wait for the first big short term recovery in the TY and reverse short.
Of the day trading systems, Phi Plus Dax was the big winner with gains of +$2,672.85 on 12 trades. Compass SP took silver with profits of +$1,900 for the month. Similar to the swing system, BounceMOC eRL had three trades for gains of +$712.
Elsewhere, Impetus eRL struggled to stay above water and lost -$425 for the month. Navigator eRL recorded its worst month of the year with losses of -$1,380. Finally, BWT Zones Classic SP had a large setback of -$7,975.
The Long Term system sector was fairly quiet in May as far a positions are concerned, although some areas of the futures arena did show signs that some markets could be setting up for changes on the horizon. There were a few sectors that did have decent moves, but the norm for Long Term systems is a concrete trend before entries are elected. Market worries on the welfare of world economies continue to keep the financial sector volatile and choppy. Sectors like the livestock and soft commodities did have some moderate movement and portray signs of possible trend strength as the market focus seemed to turn to deviation in the supply/demand situations both domestically and abroad.
The grain markets gathered upside momentum after the recent correction with soybeans (13-week highs) and soy products leading the way on ideas that world supply tightness will be a real concern as the year moves on. Weather turmoil should continue to be the norm for the month ahead as any extended hot and dry period leading in Midwest sparking high anxiety and most likely much higher prices. Oversupply which had been the catch phrase for items such as cotton, sugar, and coffee seemed to subside as these commodities posted decent corrections from multi-month lows. Aberration is long Bean oil with a gain of +1728.00 (open trade), short cotton with a gain of +$1250.00 (open trade), and short sugar with a loss of -$212.80 (open trade).
The interest rate sector turned back on hard times as most terms heading down with 8+ lows seen in most areas on ideas the FOMC will not lower rates in the U.S. this year after a month of favorable economic data. Expectations of weakening economic data did not come to fruition during the month and coupled with the idea that the Fed is in a "comfort zone" concerning inflation lead to higher yields which also attracted foreign investors to the U.S. especially with concerns of inflation gaining momentum in Europe. March remained fairly quiet as far as long term systems go, but the recent change in market conditions could bring the long term trend followers on to the playing field if near-term support fails. Aberration is currently short the Euro-bund and is currently showing +$1,460.00 (open trade) gain.
The Euro dominance over the currency sector lost a bit of luster in May as worries of rising inflation which could weaken their economy sparked a decent correction from 3+ year highs against the U.S. Dollar. The Japanese Yen on the other hand continued it’s trek down moving to lows not seen since 2003 on continued worries of poor economics in Japan. Aberration is short the dollar index losing - $410.00 (open trade).
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IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.
Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.
Please read carefully the CFTC required disclaimer regarding hypothetical results below.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.