Option experts: try to figure out a fund's strategy

Hi Option Experts!!

I've been looking into a volatility arbitrage fund and try to figure out its strategy. Unlike many other short vol strategy, they have decent return profile (at least didn't blow up in 2008). So I am trying to dig deep into it. They trade SPX only. I am posting two files down here.

1st one is the graph of its risk profile, with 1,2,3 month expiration. The report was run on 1 week horizon.

2nd one is its risk profile xls with 4 time horizon (intraday, 1, 2, 3 weeks). green is profit zone, purple is loss zone. The report was run on 6/19/2009 option expiration on SPX.

Basically what I want to find out is what kind of positions can replicate this risk profile. This fund's return is about 12% per year, including 2008, even though they lost 6% in Oct 2008. If you want to discuss in private, send me an email jjsmith8868@gmail.com.

JJS

 

Any short position that has an inverted triangle in the center of the risk graph will look somewhat similar to your graph in a one week view before expiration (calendar, straddle, strangle, etc.). In addition, you have no idea if/how they actively adjusted their positions when they moved adversely. So my 2 cents is that there's no way to know.

 

I am not sure why the op is hiding who they are but LJM has been discussed here before.
As far as I know their main focus is just selling OTM options and hoping. Saying they didn’t “blow up” when they had a 57% drawdown in October 2008 and were still down almost 50% for the year is a little misleading.
I have read through their stuff briefly and I don’t see anything accept a guy who got really rich by selling a company then with no option experience or expertise decided to start a company selling options. The so called risk controls of all of these type of funds are nothing more than a mirage.

If anyone here has the $500k minimum investment and are thinking about opening an account where they have complete personal liability for any debits and they want some guy to sell naked options in their account, then they may want to rethink that plan.

 

Volatility arbitrage? Strange use of terms for someone selling straddles or strangles.

 

yes, someone guessed right. Someone referred me this fund for potential investment, so I am about to check them out.

I think their risk is very much like short straddle/strangle(combination) positions, but what amazes me is their stress test sheet that I didn't manage to attach it the first time.

They stress test as much as 20% SPX down for a week of time (pretty much like sep-oct 2008) - on the far left. They would only lose about 4%. That's just amazing on paper. Is it possible?

 

Iron Condor - just buy some further OTM options to cap the maximum loss.

 

Anything's possible with a hypothetical hedging model. Can they do it live though? Is that what they did in '08?

 

Their fund states that they have limited risk on the downside (they sell put spreads not naked puts) and unlimited risk on the upside (naked calls).

 

No offense but something doesn’t ad up here.
The fund you were referring to is their preservation and growth fund, which is not a great way to go because it has limited upside but if the giant collapse in the market ever does occur you will have a big loss. What doesn’t make sense is you coming to ET to ask about a fund that has a $3 million minimum. Since only a fraction of someone’s portfolio would go into something like that you would have to have at least a $10 million portfolio and would have a host of experts as your disposal and would not be posting here. In a nutshell you won’t find anyone credible here telling you to put money with them.

 

The chart was limited; so all we know is they are risking 2-3x the potential. Unfortunately the chart doesn't show if the PNL goes flat at some point. Something like 7% loss with a 2-3% gain. There isn't much difference between an ATM straddle and a 1100/1300/1500 fly.