Managing a Market Correction in your Portfolio

Transcription

1 Managing a Market Correction in your Portfolio October 2015 Gareth Ryan Founder & Managing Director

2 Risk Disclosure Options are leveraged products that involve risk and are not suitable for all investors. Before committing capital to any options strategies, read the Characteristics & Risks of Standardized Options provided by the Options Industry Council. For a copy call A copy is also available at: IUR Capital is an investment advisor firm registered with the Securities & Exchange Commission and authorized and regulated by the UK Financial Conduct Authority. We do not hold any client funds. Client accounts are held at a FINRA regulated broker-dealer and clearing firm. Neither the presenter (Gareth Ryan) or IUR Capital is a FINRA registered representative. IUR Capital is not affiliated with Interactive Brokers LLC, or any other FINRA broker-dealer. Interactive Brokers does not endorse or recommend IUR Capital. Interactive Brokers provides execution and clearing services to customers of IUR Capital. For more information regarding Interactive Brokers, please visit None of the content discussed in this presentation carry an offer or solicitation of an offer to buy or sell any security or operate any specific strategy. Any securities included in this presentation are for illustrative purposes only and are not intended as recommendations. Execution fees for US options contracts with Interactive Brokers are $0.70c per contract for non-directed orders and $1.00 per contract for directed orders. Where multi-leg strategies (including spreads) are discussed, the execution fee is per leg and therefore multiple commissions will apply. The information provided in this presentation is believed to be accurate, but the accuracy and completeness of the information is not guaranteed. Investors should not rely on any information for the maintenance of books and records or for tax, accounting, financial, or regulatory reporting. Past performance is not indicative of future results. 2

3 Host Profile (Gareth Ryan) Began his trading career at 19 years old in London Proprietary Spot FX Trader EUR/USD, GBP/USD Went to work for a Wall Street Broker in Equities & Options Founded IUR in 2007 registered with the Securities & Exchange Commission as an investment advisor firm and regulated by the UK Financial Conduct Authority. IUR Capital is an investment advisor for its clients on the Interactive Brokers TWS Advisor Platform. Specialising in options strategies for client portfolios Regular guest Bloomberg/FOX TV 3

4 August correction summary a lot of negatives 260 points swing on the S&P 500 index from August 24th August 24 th US open saw the Dow Jones Industrial Average drop more than 1000 points. Dow components dropped 15-20% but recovered. European markets had their biggest one-day sell off since the 2008 financial crisis. FTSE 100 / DAX entered bear market from April highs CBOE VIX had it s biggest spike on record Asian markets also entered bear market Nikkei 225 / Hang Seng Index Shanghai Composite had 2 consecutive days of 8% declines Source: Interactive Brokers

5 SPX S&P YEAR INDEX CHART 2 YEAR CHART SPX S&P (S&P 500 Index 500 Index) 1 Year 1 Year S&P 500 Index 1 Year 4% MINI-CORRECTION 6% MINI-CORRECTION Source: Source: Source: Interactive Interactive Interactive Brokers Brokers Brokers

6 SPX S&P YEAR INDEX CHART 2 YEAR CHART SPX S&P (S&P 500 Index 500 Index) 1 Year 1 Year S&P 500 Index 1 Year 4% MINI-CORRECTION 6% MINI-CORRECTION October lows of 1820 were re-tested Source: Source: Source: Interactive Interactive Interactive Brokers Brokers Brokers

7 SPX S&P YEAR INDEX CHART 1 MONTH CHART IWM (Russell 2000 Index) 1 Year IWM (Russell 2000 Index) 1 ETF Year 2 year 4% MINI-CORRECTION 6% MINI-CORRECTION Source: Interactive Brokers Source: Source: Interactive Interactive Brokers Brokers

8 CBOE VIX 2 INDEX YEAR CHART 2 YEAR CHART CBOE VIX (Volatility Index) 2 Year FXE (Euro Trust ETF) 1 Year 50% spike in 2 days Aggressively bearish on euro? Buy OTM puts Modestly bearish on euro? Sell OTM calls/call spreads Both of these strategies will benefit from continued euro weakness EVERY SPIKE IN VIX DURING 2014 HAS BEEN AGGRESSIVELY SOLD INTO. THE BIGGER THE SPIKE, THE BIGGER THE CORRECTION Source: Source: Source: Interactive Interactive Interactive Brokers Brokers Brokers TRANSLATES INVERSELY TO BULLISH SENTIMENT ON SPX

9 What lessons have you learned from 2015 so far? Retail investors appear to have a habit of being overactive Income generation strategies should have had a solid year, unless they were sailing too close to the wind with strike selection What about your approach to risk? Sufficient hedging in place to protect bullish strategies? Call buyers in many cases saw their asset wasting in value without the upward move in the underlying an alternative strategy may be worth considering

10 What objectives do you have for the rest of 2015? Recovering from the August sell-off! Look at your objectives for your portfolio this year Then you may want to look at where you can generate premium through income strategies e.g.; credit spread between September December. Select suitable vehicles At IUR, our preference is on large cap indexes as vehicles We avoid having too large a basket of underlying securities. We consider longer-term horizon with positions (e.g.; days.) What about outside advisory input on what you want to do, particularly on strategy / risk?

11 Scenario 1: $500k portfolio You are in the age range, married with 0 / 1 dependent You are looking to supplement income from employment through your current portfolio Currently invested in bonds, mutual funds, dividendpaying stocks You want to generate consistent income in the portfolio BUT with a focus on capital preservation You are willing to allocate 15-20% of the overall portfolio to a conservative options strategy to generate regular premiums You want to achieve regular premiums even if the market remains flat through the rest of 2015

12 Scenario 2: $100k Retirement Account You are nearing retirement or already retired, with no dependents Your income has dropped; you are concerned that you may not have enough to meet daily living costs Mostly invested in bonds with a small element of stocks, but your income is not sufficient for regular drawdowns Preserving your capital in your retirement accounts is a priority But you are willing to look at an income strategy using options that does not require a rising market You want to achieve regular premiums even if the market remains flat through the rest of 2015

13 Volatility Strategies Why the straddle or strangle? Speculating volatility of the stock Straddle BUYERS expect higher volatility Straddle SELLERS expect lower volatility Stranglers expect a similar movement, BUT with a different risk/return scenario Volatility in the front month is now extremely elevated.but the back months less so

14 The Long Straddle Purchase of one call Purchase of one put Same strike price, underlying and expiry date. Risk Profile Maximum Risk Net Debit Maximum Reward Unlimited Downside Breakeven Strike less net debit Upside Breakeven Strike plus net debit Option strategies involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges.

15 Long Straddle Example With ABC stock trading at $50.00 Buy 1 ABC 50 Call at $3.20 Buy 1 ABC 50 Put at $3.00 Net Cost $6.20 * 100 = $ The 50 straddle is purchased for a total cost of $620 plus commissions. Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges.

16 Long Straddle P/L

17 Long Straddle Pricing Behaviour

18 Straddles vs. Strangles Strangle Maximum loss possible over wider range than straddle Straddle Maximum loss only if stock = strike price at expiry Combination (strangle) Maximum loss anywhere between two strikes at expiry

19 A recovery strategy If the August correction was painful with you on a stock portfolio, then you may need to devise a plan to recover through the rest of this year Income strategies Leave out directional strategies for now Credit spreads far OTM put spreads being sold for premium Allow plenty of room for more volatility with your strikes selection.

20 Working with IUR on this strategy We run our client portfolios like individual businesses SPY and IWM are our primary vehicles for our client option portfolios that we advise but not always as a volatility play. Option buyers generally benefit more than option sellers however underlying price may move up and option prices will change due to changes in volatility. SPY and IWM vehicles should only form part of an overall option portfolio, and position sizing should be appropriate. You may combine a volatility position with another strategy when you are more neutral than bullish/bearish on other securities in your basket.

21 Managed Options Account 2015 Highlights Dedicated IUR options portfolio manager allocated to your options account. Work with your advisor 1-to-1. Discuss your objectives, risk tolerance and time horizon. Direct advisor input on option strategy setup for the underlying security, strike selection, position sizing. Strong emphasis on risk management. Your options portfolio manager will undertake and monitor option positions. Option account updates are available daily via account management Focus on obtaining consistent growth for your options account Our Options Advisory Process Market Outlook Ongoing input from your IUR Options PM on broad market sentiment Sector/Industry Analysis Time Horizon Strategy/Strike Selection Portfolio & Risk Adapt a Neutral/Bullish/Bearish stance Guidance on use of near-term/ longer-term options expiry Use of single leg/two leg and 4-leg options strategies for ITM/ATM/OTM strikes. (Multiple leg strategies will incur multiple commission charges.) IUR applies key risk parameters on all options positions that will be monitored by your options account manager.

22 The next step us to arrange a 1-to-1 call with our options advisors or to request the slides for this webinar. Gareth appears live on Bloomberg and Fox TV on a regular basis.