baccarat strategieTRADING PROGRAM DESCRIPTION

Leipzig hotel roomsThe objective of the Advisor’s trading program (“Equity Index Options Program”) is to earn investment income primarily through the purchase and sale of commodity futures and options on futures contracts. The Advisor’s trading program currently is limited to transactions in options on futures contracts in equity index products listed for trading on the Chicago Mercantile Exchange, in particular, the Standard & Poors 500 Stock Index, with a futures overlay. The program is designed to provide clients with an exposure to the equity markets with anticipated returns that are not correlated to the directional moves of these markets.

The Equity Index Options Program is a market neutral trading strategy that is designed to produce absolute monthly returns that are significantly higher than the risk free rate (i.e., the 90 day Treasury Bill rate). The risk profile of the program is lower than some other trading programs, because (1) maximum defined losses are built into all options spread trades, and (2) a significant statistical edge is exploited in the strategy. Nonetheless, as with any speculative trading program, losses can be substantial.

The options component of the Equity Index Options Program attempts to identify relative value trades along the volatility surface. Options trades are typically done as vertical spreads (i.e., two different strikes with the same expiration) such that there is always a maximum loss (or profit) built into the trade at inception. Theoretical values of option spreads are based on a combination of current at-the-money implied option volatility, the historical behavior of implied at-the-money volatility, and the historical volatility of actual daily returns of the futures contract on the equity index product. A histogram of the daily returns is analyzed to test for normality and to look at higher moments such as skew and kurtosis.

When options spreads are sold, the maximum loss is the difference between the short strike and the long strike less the premium received. When options spreads are bought, the maximum loss is the premium paid. The spread transactions are continuously “delta-hedged,” thus enabling the Advisor to strip out most of the day-to-day directional market component of the trade and focus on capturing the excess value embedded in the spreads originally purchased or sold.

Around these delta-hedged option spreads, the Advisor, in its discretion, may trade futures contracts on the Standard & Poors 500 or other equity index products for the purpose of adding value to the core option position. In order to provide consistency and reliability to this discretionary trading, the Advisor bases most of its trading decisions on a proprietary data-filtering program that the Advisor’s trading principal has developed. It categorizes historical price movements in the Standard & Poors 500 into various patterns given current market conditions. The expected path of future prices over the next 24 hours is generated. The statistical significance of the forecasts is generated. The output helps the Advisor choose position size and direction. The Advisor has found that the futures overlay complements the equity index option program quite well and it is used solely for that purpose.

ERROR MSGWhen the Advisor deems it prudent, it will eliminate portions of the short legs of a spread. This is particularly true in turbulent markets or when the Advisor’s filtering models suggest a high probability of a large move in the direction of the short strikes. Short spreads generally are not carried to expiration.

Positions are actively managed such that short option spreads are rarely in-the-money.