Implied Velocity Strategy (IVS)

Transcription

1 Implied Velocity Strategy (IVS) INVESTMENT OBJECTIVE/STRATEGY Strategy seeks to provide incremental income through a rules-based, mathematical process of selling dynamically positioned index-based call and puts spreads. Requires no initial client fundingclient posts collateral/marginable assets and cash to cover any losing trades. ATTRACITVE FEATURES Requires no initial funding. Client posts collateral/marginable asset(s) to cover maximum loss potential required by broker and cash to settle any losing trades. Returns independent of beta source. Strategy can be implemented over any marginable asset(s) and does not alter current holdings or allocation. Favorable tax treatment: Section 1256 IRS tax deduction Spread trading allows for custom maximum-risk-budget PHILOSPHY Seeks to exploit derivative pricing inefficacies that are existent and persistent. Implied volatility has exceeded historical volatility 88.87%* of the time, creating an attractive scenario for selling excess volatility within the options markets % Historical Volatility Implied Volatility > Historical Volatility 88.87% Of The Time % Implied Volatility Spread % 5.000% % STRATEGY EXECUTION *Data source: Thomson one, CBOE, Archer Capital Management The strategy is designed to receive a premium from the option buyer by writing a sequence of weekly, out-of-the-money (OTM), index-based call and put spreads. Typically, two-week, Out-of-themoney (OTM) put and call spreads are written against the S&P 500 index (SPXW). Upon expiration, if the value of the S&P 500 Index settles beyond the SPXW strike price, the option finishes inthe-money (ITM) and the client has the obligation to pay the buyer the difference between the strike price and the value of the S&P 500 Index. I m p l i e d V e l o c i t y S t r a t e g y 1

2 PROFIT & LOSS The following shows a hypothetical profit and loss diagram for a single trade: As levels of implied volatility fluctuate, trading-confidence-intervals are sequentially re-adjusted to minimize exercise risk. The following depicts a hypothetical re-positioning for either spread: Max Loss: Max Loss: SPX -10 SPX Market Market Price > Max Gain: -15 Price < Long Long Strike 100% Options Strike Premium -20 Retained Long PUT Short PUT SPX MARKET PRICES Short CALL Long CALL Only one spread has the potential to settle in-the-money (ITM) Implied volatility reflects investor expectations of the market experiencing changes in value over time and is a key impute for valuing options. As implied volatility is rising, generally there is a devaluation in the broad index for stocks, as captured by the S&P 500. The historically negative correlation between S&P 500 index valuations and rising levels of implied volatility is tracked by the Volatility Index (VIX). The VIX can be read as the expected range of movement in the S&P 500 index over the next year, at a 68% confidence interval. As levels of Implied Volatility fluctuate, expectations of future asset valuations shift in tandem and as a result, the cost of downside protection (puts) and upside speculation (calls) re-adjust to reflect. Empirical research shows that implied volatility exceeds historical volatility resulting in a majority of option valuations finishing out of the money. INVESTMENT PROCESS 1. Standard brokerage application is completed in conjunction with margin, otions and POA agreement. 2. Client provides notional portoflio (a fraction of this amount is used for collateral/margin.) 3. Trades are exectuted weekly. 4. At Expiration, new option contracts are opened at appropriate levels. Losses that occur from a short strike settling in-the-money will be funded by the client. FEE SCHEDULE & ACCOUNT MINIMUM Investor meets accreditation standards Wrap fee inclunding a percentage of notional account value and/or performance fee of 30% of the excess total return exceeding 3MLIBOR+25BBS. I m p l i e d V e l o c i t y S t r a t e g y 2

3 PERFORMANCE IVS seeks to provide a steady and capped stream of income per write. Rules-based trading approach seeks to achieve profitability on more than 90% of all trades. Investors are exposed to potential losses when the S&P 500 index moves outside of a pre-defined range. The following depicts hypothetical perfomance for IVS: The vertical distance between the short and long strike represents a capped point-to-point loss potential Selected Performance Period: 01/02/ /29/2017 A Max Loss results in a closing value of the S&P 500 finishing at or above either long strike value Short Call Short Put Long Call Long Put S&P 500 Closing Value /7/2015 1/7/2016 1/7/2017 The inner band represents a Maximum Gain, where the S&P 500 closing value finished within either short position From 01/02/2015 to 12/29/2017, a total of 157 trades were placed of which 149 finished out-of-the-money (OTM) and 8 finshed in-the-money (ITM) resulting in a 94.9% success rate. The pointto-point loss on trades finishing ITM was The average premuim retained per trade was ~3.53 net-credit points which generated an aggregate and gross credit-points. On a netted basis, before fees, IVS returned net-credit points. 1 Year (17') 3 Year 5 Year 10 Year Inception (00") Profit (OTM) Loss (ITM) Gross Net The results above are not from actual trades that were executed for a single account. These results were conducted in conjunction with an extensive back-test, are hypothetical, and may differ from actual trades due to fees and/or other execution limits. Results are presented gross of any trading commissions or management fees. All performance numbers are quoted in Credit Points, unless stated otherwise. Archer capital requires clients post 5 X capital requirment and 10% Total Account Value (TAV). Year 1 returns for mimimum account requirements would have been $15, Net Cash Flow/ $250, TAV = 6.172%, before fees. For management fees and minimum account size requirements, contact Archer Capital for a copy of its Form ADV Part 2A Please see Characteristics and Risk of Standardized Options available at both of which must precede or accompany this presentation I m p l i e d V e l o c i t y S t r a t e g y 3

4 GLOSSARY OF KEY TERMS Call Agreement that gives an investor the right to buy a financial instrument at a specified price within a specific time period. This creates an obligation to sell for the seller. Out-of-the-money A call option is said to be out of the money when the current market price is below the strike price of the call. For a put option, the current market price is above the strike price. Implied Volatility The estimated volatility of a secutrity's price which is used by option traders to price an option, based on a particular option-pricing model. Premium The amount of money the buyer pays the seller recieves to engage in an option transaction. In-the-money A call option is said to be in the money when the current market price is above the strike price of the call. For a put option, the current market price is below the strike price. Put Agreement that gives an investor the right to sel a financial instrument at a specified price within a specific time period. This creates an obligation to purchase for the seller. Long Contract A position in options in which you have purchased a contract. Realized Volatility The actual fluctuation of an underlying security's price, either up of down. Notional The value of an asset expressed in dollars used to construct derivative transactions. Short Contract A position in options in which you have written (sold) a contract. Option Spreads An option position that is constructed of equal number of options of same class (puts or calls) and underlying asset but differ in either strike price or expiration. Strike (exercise) Price Stated price per share for which an underlying stock may be purchased (Call) or sold (Put) by the long option holder. Volatility RISK CONSIDERATIONS Options trading is not suitable for all investors. This fact sheet must be preceded or accompanied by the Characterstics and Risk of Standardized Options. If the SPX index becomes more volatile, causing more of the short calls and puts to settle in-the-money, there may be a negative impact on performance. If liquidity and pricing transparency in the weekly expirations diminishes on out-of-the-money strikes, there may be a negative impact on performance. Transaction costs may be significant in multi-leg option strategies, including spreads, as they involve multiple commission charges. If the underlying portfolio is either highly positively correlated or highly negatively correlated with IVS, there may be times when losses experienced in the underlying portfolio are exacerbated by the IVS overlay. If the S&P 500 or Volatility Index-listed options become unavailable to trade, the strategy may be unable to be implemented Tendency of the underlying security's market price to fluctuate up or down. Margin requirements for option writers are complicated and not the same for each type of underlying security. They are subject to change and can vary from brokerage firm to brokerage firm. As they have significant impact to the risk/reward profiles of each trade, writers of options (whether they be calls or puts alone or as part of multiple position strategies) should determine the applicable margin requirements from thier brokerage firms and be sure that they are able to meet those requirements in case the market turns against them. There is no assurance that Archer Capital will be successful in implementing There the Implied is no assurance Velocity Strategy that Glenwood Capital will be succussful in implementing the Implied Velocity Strategy. I m p l i e d V e l o c i t y S t r a t e g y 4

5 Archer Capital Management Supporting documents for any claims (including claims made on behalf or options programs or the options expertise of sales persons), comparisons, recommendations, statistics, or other technical data, will be supplied upon request. INVESTMENT AND INSURANCE PRODUCTS: Are not FDIC or any other Government Agency Insured * Are not Bank Guaranteed * May Lose Value Located in Atlanta, Georgia, Archer Capital Management is a Registered Investment Advisor that offers specialized investment services to a broad spectrum of institutional and high net worth clients. Archer Capital Management continues to expand it s computer modeling and analytical infrastructure to capitalize on opportunities in the financial markets on behalf or it s clients. 880 Glenwood Ave SE Atlanta, GA P E Alex.Pittenger@ArcherCapitalManagement.com I m p l i e d V e l o c i t y S t r a t e g y 5