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The hottest game in town: S&P 500 Option Selling CTAs
December 4, 2006
How do you make money in this market? Well, nobody knows for sure, and past performance is not necessarily indicative of future results, but if you're one of the fastest growing investment segments in the managed futures industry - you sell options, also know as selling volatility. And with volatility at historically low levels, it makes a lot of sense that those CTAs who are selling volatility have become one of the hottest games in town.
For a quick refresher, CTA stands for Commodity Trading Advisor. CTAs manage accounts for individuals and institutions, and usually charge a 1%-3% annual management fee as well as 15% to 30% incentive fee - or share of the profits.
So what are these option selling CTAs doing that's so special? The answer to the first question is that they are profiting from the inherent time value decay in options. When you sell an option, and all else is held equal, the price of that option will decline to zero by the expiration date. You've most likely heard the old saying that 90% of options expire worthless, and while we're not interest in whether or not that statistic is true - you get the idea - that a lot of options end up being worth nothing, nada, zilch.
All of these advisors are attempting to profit from this time decay property of options in one manner or another, whether it be selling naked call or puts, selling bear credit spreads, or selling bull and bear credit spreads simultaneously - an "Iron Condor". The question of how these advisors and their strategies differ seems to come up more with different option selling strategies than anything else, and it is important to note that these are merely using option selling as their investment vehicle, and the different strategies and methods of getting into and out of positions (and when to get in and out) are what really add value and create the performance.
As one of our clients said, "anyone can sell options", and this difference may seem small, between the tool (options selling) and the method (where and when to sell them). But just imagine yourself at the plate trying to hit a 95 mph fastball, versus what Hank Aaron or Mickey Mantle could do in the same situation, and you can see that the tool (the bat) is not as important as the skill using it.
These advisors skill in using the "bat" is based on where and when they sell their options. Some sell them much closer to the market than others, and in doing so generate higher profit, but with higher risk. Some have theoretically unlimited risk with naked writing of options, while others prefer spreads which insure the loss is no more than the difference between strike prices.
So how can you tell all of these different option selling CTAs apart? As always, we're glad you asked - and have created the following table for help in seeing each of these option selling CTAs side by side.
Option Seller Comparison:
Past Performance is Not Necessarily Indicative of Future Results
|CTA||Avg Ann RoR||Max-DD Month-End||Sharpe Ratio||Assets Managed||Option Strategy|
|ACE Investment Strategists||59.20%||-7.80%||2.50||$105 Million||Short Strangle/ Naked Writing|
|Argus Capital||46.42%||-13.42%||2.04||$13 Million||Bull/Bear Credit Spreads|
|Outrigger Asset||25.63%||-12.63%||1.90||$20 Million||Iron Condors|
|World Capital, Inc||25.52%||-4.25%||2.47||$20 Million||Iron Condors|
|Zephyr Asset (Moderate)||24.76%||-2.99%||3.23||$10 Million||Short Strangle/ Naked Writing|
|Zephyr Asset (Aggressive)||32.72%||-3.99%||3.79||$12 Million||Short Strangle/ Naked Writing|
|Zenith Resources Diversified||21.70%||-0.00%||7.26||$25 Million||Naked Writing/ Credit Spread|
|Zenith Resources Index||26.47%||-3.12%||3.40||$90 Million||Naked Writing|
Important Risk Disclosure
|CTA||Avg Call/Put Positions||Put Prox to Market||Call Prox to Market||Successful Market Types||Difficult Market Types|
|ACE Investment Strategists||40% Calls 60% Puts||4-10%||2-5%||sideways, no big moves up or down||Down 15-30% in a 1-3 day move (Oct '87, 9/11)|
|Argus Capital||85% Calls 15% Puts||4-6%||2-5%||down, sideways, slow rise||2% to 5% market rise, especially in successive wks|
|Outrigger Asset||50% Calls 50% Puts||5-10%||4-8%||down-trending, neutral, slow rise||5% mkt rise in one month or 9/11 style move|
|World Capital, Inc||50% Calls 50% Puts||5-10%||4-8%||down-trending, sideways, slow rise||9/11 or 5% mkt rise in one month|
|Zephyr Asset (Moderate)||50% Calls 50% Puts||6-10%||4-6%||down trending, sideways, slow rise||Down 15-30% in a 1-3 day move (Oct '87, 9/11)|
|Zephyr Asset (Aggressive)||50% Calls 50% Puts||6-10%||4-6%||down-trending, sideways, slow rise||Down 15-30% in a 1-3 day move (Oct '87, 9/11)|
|Zenith Resources Diversified||20% Calls 80% Puts||7-10%||5%||down-trending, sideways, up||Down 15-30% in a 1-3 day move (Oct '87, 9/11)|
|Zenith Resources Index||10% Calls 90% Puts||10%||n/a||down-trending, neutral, up||Down 15-30% in a 1-3 day move (Oct '87, 9/11)|
You can see in the first table above that these strategies have enjoyed a lot of success, with an average annual return of 38% across all of the programs and average drawdown of just 6%. There's an old saying that likens selling options to "picking up pennies in front of a freight train", but the freight train simply hasn't come down the track in a while, enabling option sellers like the ones below to post rather consistent profits over the past few years (Past Performance is Not Necessarily Indicative of Future Results)
Two questions we get a lot when talking about option selling CTAs, especially from investors who are already employing a few option sellers operating on the S&P 500, are 1. why are most option selling CTAs using the S&P 500 market, and 2. Are there any option selling CTAs who utilize similar strategies on markets besides the S&P 500.
Well, the answer to the first question is that most CTAs use the S&P 500 futures options because it is where they find the best volume and liquidity. With over 40,000 options trading hands each day, there is plenty of room for advisor to get in and out of their positions. Compare that to a market like coffee, where just a thousand or so options may trade all month.
The answer to the second question is Yes, there are CTAs who utilize option selling on other markets. The best of the bunch we have found so far, is Financial Commodity Investments. Click on the name to see the track record.
We hope this table answered some questions and gave you some insight into how these different strategies differ, but we're aware it may have brought up just as many questions as it intended to answer. Call us at 800.311.1145 or email email@example.com with any questions you have.
- Jeff Eizenberg
IMPORTANT RISK DISCLOSURE
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Past Performance is Not Necessarily Indicative of Future Results: The dollar amounts shown below represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per R/T commission ($30 per emini). Except where noted, the gains/losses are for closed out trades. Percentage gains/losses are hypothetical and based on developer recommended initial balances as listed at www.attainaccess.com. Please carefully read the important risk disclaimers below.
November was good month to be long, no matter which markets you prefer to speculate in - as nearly every asset moved higher in November. In equity trading US Stocks continued their slow but steady rally as the US economy has proven to be very strong and resilient. Perhaps this was the annual "Santa Claus rally" a month early, however. For the month SP futures gained +1.42%, NASDAQ futures were up +2.98%, Russell 2000 futures rallied +2.14%, and SP Midcap 400 futures moved +2.75% higher for the month.
Much like stock traders, US bond traders have also had their eyes on the economy in an attempt to predict exactly whether or not the Fed will raise interest rates in the near future. Right now all signs are pointing towards no as the US economy keeps chugging along and inflation indicators have stabilized. Thirty year bond futures reacted positively to various job & inflation related economic reports in November and gained a total of +1.53% for the month, while 10 year note futures were up +0.82%.
The surprise move of the month belonged to the US Dollar and its foreign currency counterparts. As US traders dined on turkey over Thanksgiving, overseas traders were selling Dollars and loading up on Euros. Most of the movement was a result of speculation by European analysts and traders that the US economy is not as strong as it appears, causing the US Dollar to lose value at a rapid pace over the last week of the month. Overall, for the month the greenback was down -2.66% while the Euro was up +3.63%, the Swiss Franc gained +3.45%, and the Japanese Yen moved +0.56% higher.
Energies rebounded in November despite relatively mild temperatures across the US. Most of the rise in energy prices can be attributed to continued speculation that OPEC is going to cut production relatively soon. Crude Oil futures gaining +4.12% in November, RBOB Gas futures were up 11.72%, Natural Gas futures climbed +10.15%, and Heating Oil futures moved +7.33% higher.
Finally, most commodity markets enjoyed rallies in November as well. Grains led the charge with Corn futures gaining +16.05%, Soybeans were up +6.40%, and Wheat futures moved +3.57% higher. Metals also enjoyed rallies with Silver futures gaining +13.31%, Gold was up +6.47%, while Platinum +8.24% and Palladium +1.94% also traded higher. High Grade Copper did not follow suit however losing -5.42% for the month. In the tropical markets Sugar gained +7.10% and Coffee was up 10.64%, cotton finished the month unchanged. Finally, meats were the only commodity sector to move lower with Lean Hog futures losing -4.37% and Live Cattle futures dropping -2.14%.
November saw several of thediversified CTA’s who don't operate in the option selling space rise abruptly to the top of the performance charts. Attain's own Strategic Diversification program gained over 4% in Nov. to hit new all time highs, while the discretionary CTA Dighton had gains of over 15% in November for yearly gains of +46% with one month to go. This shift was attributed to the recent up trends in the grain markets, down trends in energies, and weakness of the US Dollar. 4th quarter run ups in the multi-market, trend following CTA’s is something we have observed in each of the last 4 years.
Beyond the multi-market CTAs, most of the option selling CTAs posted "normal" monthly gains between 0% and 2%. One big exception to that was the Argus program, which continues to struggle through the exact market environment it does worst in (a consistent, slowly rising market). Argus gave back about 15% in November.
Looking ahead to December, we have seen a pick up in market volatility since the mid-term elections in the US, and as a result option selling investors can expect to see the level of activity by the managers pick up…stay tuned to your accounts for the most up to date activity.
***Day & Swing Trading***
It wasn’t all smooth sailing in the month of November, but the continued bull trend in stocks benefited the swing trading systems, for the most part; while the intermittent corrections paved way to some day trading profits.
Swing systems operate on multiple time frames but the common thread for profitable systems in November was holding long positions in stocks, bonds and currencies. SC Forex GBPUSD was the top performing swing system for November with profits of $5,350. The majority of the profits came from a long trade that exited just before the Thanksgiving holiday on the surge in foreign currencies. Mesa Notes was close behind with profits of +$2,345.31 after reversing to long early in the month. Delphi EURUSD also was able to profit +$1,650 in the FX market despite getting caught up in some choppy conditions around mid-month.
Some systems, like Spartan ES and SeasonalST eRL/ES, held long equities the entire month - while others like Axiom eMD and Adaptive US entered and exited several long positions throughout the month. Both strategies were roughly equal in total profits with Adaptive US making +$2,274, Axiom eMD +$1,806, Seasonal eRL +$1,490, Delphi eRL +$1,417.50, Spartan +$987.50, Delphi eMD +$960.50 and SeasonalST ES +$827.50. Bounce eRL and eMD each had one trade late in the month for small profits of +$80 and +$65 respectively.
Swings systems utilizing a counter-trend strategy such as the Tzar suite of systems didn’t have the same success as those previously mentioned. Tzar ES made +$2.50 while Tzar NQ and eRL lost -$970 and -$1,302 respectively. The good news is that all of the Tzar systems reversed to long by the end of the month and are positioned for a year-end rally. Adaptive Euro portfolio really can’t be described as counter-trend but the system struggled with direction and lost -$2,707.13 in November.
In day trading, BWT Zones Classic put together a stellar month with profits of +$4,225 - by far the most active and aggressive system. Phi Plus Dax continues to fight its way out of drawdown and tacked on +$1,641.36 for the month. Impetus eRL continues to be one of most consistent programs in ’06 and added profits of +$543.80 for the month. Bounce eMD MOC and eRL MOC made +$276.60 and +$155.70 on one trade late in the month. Both Bounce MOC (day trading) and Bounce (swing) enter trades using the same logic but the swing system can and will hold positions overnight hence the reason for different results this month.
For the most part, losses in the day trading systems were contained. BetaCon ESX dropped -$96.54, Omega3 v1 Dax -$349, Compass SP -$350, BetaCon 4/1 Dax -$625.61, Tanker CL -$900, Epsilon Bund -$929.48, Rayo Plus Dax -$1,759.49 and Beta v2 Dax -$3,179.14.
The past month had a little of everything as trending moves continued in the Grains, Energies and Interest Rates. Market pundit opinions on the welfare of world economies led to changes in the direction of currencies and sparked an upside breakout in the metals. Other sectors like the livestock and soft commodities remain fixed in choppy sideways trading ranges which, from a historic norm will probably not change as 2006 winds down.
The grain markets, especially the corn - gaining nearly 15% - continued their run as the leading capital gainers for long term systems in November. Systems holding long positions in corn include Aberration +$4250.00 (open trade), Andromeda +$3562.50 (open trade) Axiom LT +$5187.50 per contract (open trade) and Trend Simplicity with +$3450.00 (open trade). Vivaldi closed out a long soybean trade with a nice gain of +$3875.00 per contract.
The interest rate sector moved forward with the current uptrend as most terms headed to the highest levels since January 2006. Systems with long Bond positions include Andromeda making +$4662.00 per contract, Vivaldi making +$3009.00 per contract, Pegasus making +$1416.00 per contract, and Trend Simplicity +$822.00.
Notable trades (both good and bad) from November include Andromeda exiting a short Japanese Yen trade for profits of +$5393.75 per contract and exited short Swiss Franc for a loss of -$262.50 per contract. Aberration exited short Swiss Franc for a loss of -$4437.50 and mini Crude Oil for a gain of +$6375 per contract, while Andromeda also exited Crude Oil for a nice gain of +$14160.00 per contract. Finally, Trend Simplicity exited long crude oil for a gain of +$14100.00 per contract, but did give some back closing out a short Copper trade with a -$1800 loss and a short Live Cattle trade with a loss of -$ 600.00 per contract.
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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.