Approaching Prop firms/Arcades

Status
Not open for further replies.
Z

zf trader

Those of you who have read my posts will know that I am a big fan of long option trading. I like to use long options to limit risk and profit from trading the underlying in congested markets. I have been doing this since August 2004 with an IB account. Before that I traded credit spreads successfully and spent some time rebate trading a swift with mixed results.
Right now I trade my own account from a small town in Rural Ontario. My cost of living is very low and I can almost cover all of it by refereeing hockey which is something I quite enjoy. The thing is though if I want to move forward I need to move out of my comfort zone into a new challenge. My long term plan is to create a fund that:
-pays out monthly dividends from trading
-can be used as a substitute of an equity portfolio, using long options as a capital efficient way to gain upside market performance
-Can be structured in such a way that it can go public as a Canadian income trust.

To get to this stage I need to develop a track record trading bigger sums of money. I could raise money from family and friends but I only have so many "bullets" so to speak and I want to use them at the right time.

My ideal situation right now would be a pro firm that would give my an account with $10,000 margin in it that I could trade remotely. This way I wouldn't have to move to a higher cost area. Ideally the firm would understand that my risk management is the long option, that I would need to average down and the I would need to hold "overnight" positions as trades would be made at all hours of the day as markets move. As my account becomes profitable I would expect more margin and then look to move to the city where the office is located. It would be a good deal for the pro firm as I can say what the risk will be up front and will start generating commissions right away. The risk reward would be much better than pulling someone off the street and training them.

The less than ideal situation would be to raise $50,000 to $100,000 and join up with a pro firm to get additional margin and lower commissions. Again initially remote and then move to an office. I don't really want to do this until I am starting a fund and can show how it would fit into an investment strategy.

Okay a few questions. If I were to write a a pro firm with my ideal situation would they just laugh at me? Is there anything that I should be careful not to say as it would be a deal breaker?If I don't put up and money do I have any chance of getting my risk management scheme accepted? What firms do you think would be the best to approach if I didn't want to put up capital? Or if I were to put up some money?
 
Quote from zf trader:I am a big fan of long option trading. I like to use long options to limit risk and profit from trading the underlying in congested markets.

-can be used as a substitute of an equity portfolio, using long options as a capital efficient way to gain upside market performance

my risk management is the long option, that I would need to average down and the[n] I would need to hold "overnight" positions as trades
More...
Forgive me, I am missing something. Where is your risk management? All I see here is 100% of invested capital held at full risk.
 
good point traderstatus...
first thing I see in your risk management is "average down". I've never seen anyone ever make money in the long run by making your losing positions larger
 
zf, sounds like you might have a better chance in equity derivatives. There are alot more firms doing that than prop firms trading options.

The only problem i see is liquidity. Most options have high open interest and very little liquidity, so your system wouldnt scale beyond several million dollars.

An income trust probably has a slew of regulatory issues that would make an offshore firm seem simple. If you have a system that works, Id suggest going south before trying to do what you want to do in canada.

Do you have a way of backtesting your options strategy and comparing it to a similar equity system? That would be an interesting study.
 
I guess I need to do a better job of explaining how I intend to trade. To start with I would figure out what my risk capital for that month is. I would the set out to buy just out-of-the-money calls with that money(futures options on ES). I would average into my position based on what I thought the volatility was going to be like that day. I have a good system for the first hour of the cash trading day. From there I would look to sell futures into a strong market and buy more calls into weak markets until all my risk capital was employed. This is a dynamic trading system that requires constant adjustment. This means averaging into short positions as the market rises, and averaging into calls as the market falls. The idea is though to do most of the trading with the highly liquid future. The calls are strictly a risk management tool. They are a business expense just like fire insurance. They allow me to conserve margin and not have to worry about getting stopped out. I can tell you at the start of the month exactly what the risk will be.

Another way to put it is to buy calls to get long gamma. As the market rises the delta of the calls increases. In order to keep delta at a steady level I will sell futures. When the market goes down the delta of the options decreases, meaning the futures need to be bought back to keep delta steady.
 
You can PM me if you want. My firm specializes in derivatives and we also help guys launch funds and raise capital. We have several funds in house. What you are asking for is very simple and not a problem. Stay away from the chop shops. Just shoot me a PM.
 
Status
Not open for further replies.
Back
Top