I can give you my opinions since you don't know the name of my management company. A couple of my partners don't like me spreading info about our strats. Personally I don't think it matters. If you aren't managing money for others it doesn't really matter what you're doing. Trade to fit your personal needs. You know how often you'll need to make withdrawls. OPM is a different story. I personally think that the trader should have a monthly/weekly target return, depending on the strat. I'm not talking about RoR, RoI, RoM, etc. I'm talking about a return for the entire portfolio. If he has $1MM AUM and specifies a 2% return this month. That is $20K regardless of the risk taken or margin used. That is the only return that really matters to investors in the end. This has many benefits: -It is easy to scale up as the target return is based on AUM. -It prevents revenge trading after a drawdown, because the month following a drawdown has a target return based on the AUM after the loss. -It takes advantage of the powers of compounding. -Allows you to charge fees via profit allocation each month very easily, while constantly re-establishing the high watermark. Once the target return has been established, a max risk should be set. This determines asset allocation. This is very dependant on the strat as some positions carry 100% loss risk, while others carry less than 20%. Let's say that I'm willing to risk 10% of the account to make that 2% target. Then I'm going to need a 20% return on my positions to hit my target, and my probability of profit had better be pretty darn high. Anyway, I don't want to ramble on forever so it comes down to the following. If you consistently get >20% annually, you'll easily be in the top quartile. That only requires 1.5% monthly. To me it is important not to have >5% drawdown in a given month. Most people here know that I'm not a huge fan of selling cheap gamma, so I don't need to tie up too much capital to achieve a 1.5% return each month. We are more aggressive however, and target a 10% monthly return with about a 3:2 risk/reward. We count on diversification to prevent >5% drawdown. We ensure that under the worst possible circumstances, we won't be able to lose more than 15% of AUM. Then we target a 5% annual return on the remaining capital. If my max drawdown for the year was 3-4% then I'm happy with 40% return. If the max drawdown was >10% then I'm extremely disappointed if the annual return was less than 90%.
I am sorry. Perhaps, i didnt express myself clearly. I am not claiming that i have found a way to efficiently use all that excess liquidity. In fact, quite the opposite, i am personally happy with returning the risk-free rate plus 1 or 2 points if i am able to leg in an arb or two throughout the year. IB pays me 5% on cash so i don't have to even work for it. There is only so much risk i am willing to take during any given month and that risk is a function of the drawdown i am willing to tolerate each year. Whether i diversify/scale up/down/correlate, etc. it all falls in the capital at risk category since by definition it carries risk. The remainder just sits there risk free, its the whole point in my opinion. If you have a risk-free way to earn more than the risk-free rate consistently, please share.
RM -- I'm thinking along these lines too: - 20% of total capital at risk at any time - r/r no worse than 3:1 (risk 3 to make 1) - drawdown should not exceed 10% of total port I'm looking at CTM spreads/condors that I an leg into... or flies that I can leg into and adjust as the market dictates. These would be directional bets, not vega plays. I have not considered calendars or anything exotic. I'd much appreciate guidance and help from experts.
Your risk parameters are fine assuming that you've determined a PoP that compensates for a 3:1 risk profile. I would just suggest that if you are bent on selling gamma at these low vols, you should consider getting as close as possible to ATM. You already stated that they would be directional. Only ATM credit spreads put handcuffs on vega damage. Personally I like b-flies right now, and put diagonals.
You are not really earning the risk free rate. Once you factor in inflation plus a declining dollar, you are actually locking in losses. You need to make more then 200 to 300 bp over the "risk free rate" just to break even at the end of the year.
Cache -- thanks much. What is PoP? Also, I've looked at selling slightly ITM credit spreads as well, depending on how strong my directional conviction is (yes, moot point, credit-debit spread equivalency...). What underlying do you put flies on? Are they ATM flies?
It's not very easy to describe my trading style. I would say I'm a contract neutral, semi-directional, semi volatility based trader that is usually backspread across a variety of strikes. You could argue that I'm a long gamma trader, but I'm not really long gamma, I'm long curvature. You could say I'm a short gamma trader as the majority of my profits come from selling premium, but I'm not really selling gamma per se as I don't sell ATM options. Let's just say I'm a premium seller that is net long contracts that attempts to own as much curvature as possible for little or no cost. Confusing enough? See, I told you it wouldn't be easy to explain.
I think it's irrelevant what i am earning on the excess cash since i am not willing to put it at risk. I earn/lose whatever the market pays/inflation eats up. I cant have it both ways. Next time i will make sure to adjust my opinion for inflation and declining dollar.
But that money IS at risk. Whether you want to admit or not, you are sitting on a long dollar bet with that reserve cash. Or to put it another way, you are synthetically short TIPS (Treasury Insurance Protection Securities). Being short the TIP, forces you to pay the forward inflation rate to the holder. I bet you didn't think about it that way did you.
LOL So are trillions of dollars in fixed income ports outside your TIPS and some other inflation adjusted instruments. Last time i checked the "i" stood for inflation not insurance. Still not seeing your point?