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CTA Spotlight: BC Capital Management

June 25, 2007

 

As we mentioned three weeks ago - we hope you 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.

The next "new" CTA we would like to highlight is not new at all, having directed client accounts since 1999; and is one of the few option selling CTAs who got through the tough February/March period earlier this year unscathed. This month's CTA Spotlight is on BC Capital Management.

Who is the Manager?

The manager of BC Capital is Mr. Timothy J. Currie, of Corning, New York. Mr. Currie started in the financial industry nearly 25 years ago with Bear Stearns in New York, eventually ending up as the treasury bond trader on Bear's Tokyo trading desk.

It this capacity as a bond trader, Tim started utilizing technical analysis to take advantage of any imbalances in the yield curve. The allure of technical analysis was a natural fit for his analytical style, and as often happens - he started using his technical analysis skills on futures markets. This led to a switch to a more futures based firm named Friedman Mercantile.

At Friedman, Tim started down the path that would eventually lead him to managing money for clients when he became responsible for the development of trading systems for the company's clients. The technical analysis work he did led him to become an independent financial advisor in 1999.

BC Capital did not come into effect until a few years later, in 2001, when Tim became registered with the NFA in hopes of expanding his client base and offering the program to a wider client base. Now, 6 years later, BC manages in excess of $40 Million.

Mr. Currie is married and lives in upstate New York with his wife and three children. When he is not busy poring over market data, Mr. Currie takes great pleasure just spending time with his family. Mr. Currie also enjoys golf, Arts/Antiques, traveling and is an avid College Football fan.

How does the Program Work?

BC Capital sells front month, credit put option spreads on the S&P500 Index. A credit put spread is when you sell a put at one strike price, and simultaneously buy a put at a further out strike price. Because you are selling a more expensive premium option than the one you are buying, you take in a credit. Your risk is limited to the difference between the two strike prices, less the net premium you collected, plus commission and fees for placing the trade. By placing the trade as a spread, you never expose yourself to unlimited risk as happens with naked options. .

BC sells what they call a deep discount put option, meaning the strike price of the option they sell are usually about 10% away form the current market price, and simultaneously buys a put option 40 points below the sold option's strike price, thus creating the spread. The premium sold is always worth more than the premium bought which creates a credit (income) to the account each time a position is put on. The goal is for both options to expire worthless. The risk is that the market falls over 10% in a one month period - thus putting both options into the money and losing $10,000 per option.

As a risk precaution, BC does only do one option per $10,000 of equity, so that the account can never go on a margin call - as the spread makes it so the account can not lose more than $10,000 per option. BC believes this is crucial when the market becomes strained, as other option sellers who leverage accounts in order to achieve higher returns can be forced out of their positions at a loss to cover margin calls.

BC does specialize in selling put spreads only, and never does call options. This is due to several factors, including the fact that the average monthly gain for the S&P 500 is a positive number, meaning the market has, on average, historically moved closer to call prices above the market more than it has put prices below the market. Puts are also historically higher priced than calls, as there is more demand for them, as protection against losses for those holding normal buy and hold stock portfolios.

On this risk management side, selling put option spreads does expose the investor to downside risk in the stock market, and BC Capital uses numerous technical and fundamental indicators to gauge the health of the market so they may attempt to minimize this downside risk. They go through a rigid progression with indicators as basic as moving averages to those as advanced as implied volatility readings, all the way from an extremely long term view right down to the hourly (and less) view. After this progression is completed, BC only enters a trade when nothing is signaling them of an impending downside move.

BC also scales into their positions whenever possible. They believe this to be an important, and often overlooked practice which can limit market exposure by limiting time in the full position. Once a full position is scaled into, BC does not simply put on the spreads and hope for the best. They constantly monitor the market for any adverse developments, and utilize specific rules to signal when the risks are beginning to outweigh the reward - at which point they would lighten or roll positions. Finally, stop loss levels are put in place using a dynamic capital preservation model in which the position will be liquidated if the market moves against the option spread a certain amount over a certain time.

Trade Example:

March 9th: S&P 500 futures price = 1432.00

Sell 5 April S&P 1300 puts @ $3.75 = $4,687.50 credit

Buy 5 April S&P 1260 puts @ $2.20 = $2,750 debit

Total Credit of $4,687.50 - $2,750 = $1937.50

April 20th: S&P 500 futures price = 1507.80

Both of the Puts Expire Worthless, effectively buying the sold one back at $0

Gain on Trade = $1,937.50 Credit - $15 commission*5 = $1862.50

$1,862.50 = +3.73% on $50K minimum investment.

Attain Comments:

There is a lot to like about BC Capital, starting with the extensive experience of manager Tim Currie and their long track record moving into its ninth year.

But I fear many investors will see the 17% average annual rate of return as compared to the 44% max historical drawdown and say that is too much risk for that much of a return. I myself often tell clients that they should look for average returns that are one to two times the historical Max DD. BC's is only .38 to 1.

However, if you look closely at the track record - you will see that the drawdown came way back in March and February of 2001. And if you do a little digging, you will find out that BC was managing less than $100,000 at that time. They did not start managing client money in significant numbers until 2003.

We believe the 1999-2003 track record for BC is basically the track record of Mr. Currie as he was perfecting his strategy. And one thing he learned the hard way, with real money, was that he needed to do a better job of controlling the risk.

Many CTAs might bury this performance in their D-Docs as the personal performance of the manager before being registered as a CTA, or concoct some other way to remove it from the main performance record for BC Capital - which makes it refreshing to see that Mr. Currie did not try and hide those numbers.

That was the performance he was getting during that time, and he believes it should be reported so an investor can see the full picture of the manager. So, if we discount the 2001 drawdown and focus on what BC has done as a manager lately - we see that they have been very good. Since 2003 - the drawdown has been no more than 10% on an intramonth basis, and there have been only 7 losing months out of 53 (86% profitable), while only 3 of those months were losses greater than one half of one percent (0.5%).

Beyond the numbers, we like the fact that they do spreads and that they require at least the amount the spread can lose in an account to put on the position. This means you will not, by definition, be at risk of losing more than you've invested. To many investors who fear a big market crash one day and stay away from option selling CTAs because such a risk could theoretically cause you to lose more than in in the account - a credit spread option CTA removes that risk, while still providing the consistent results option sellers are know for.