MDC, we primarily trade options. Your plan depends entirely on timing, thus if you can predict both what stock and when it will go up then options will also work. If you can only predict one or none, then the options will lose. This is a probably a good question for the options thread section. Good trading.
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- Thread starter chessman
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You will need a CTA registration if you are trading commodity products of any kind, futures or futures options on indexes....as well as some others I probably forgot.
The second question is bit tougher to answer. Many funds are closed and don't have disclosure documents posted on the web. As far as exclusively using equity options as a strategy, I would guess very few could effectively use this strategy exclusively. Once you get any real money under management, it seems like it could be tough to deploy millions in just equity options. From your other post, I've never read of anyone exclusively using option BUYING strategies in a successful hedge fund. There are probably a few out there, but I would agree this area is unexploited...and very tough!!! Good Luck.
ktm,
Thanks for your reply
<<<<<You will need a CTA registration if you are trading commodity products of any kind, futures or futures options on indexes....as well as some others I probably forgot.>>>>>>>
But would you need it if you were only trading equity options? I can't seem to find an authoritative answer anywhere. Right now, I don't see myself trading futures, options on futures, or commodity options.
<<<<<<<The second question is bit tougher to answer. Many funds are closed and don't have disclosure documents posted on the web. As far as exclusively using equity options as a strategy, I would guess very few could effectively use this strategy exclusively. Once you get any real money under management, it seems like it could be tough to deploy millions in just equity options.>>>>>>>>>>
This is a good point which I've partially explored/worked the numbers on. I guess it depends on what you mean by "real money". You certainly couldn't run a 500 million fund exclusively with equity options but I think 10-50 million is definitely doable. Assume 50 million with a 2% position. That is 1 million. I think the equity option markets, especially for large cap stocks with high volume are deep enough and liquid enough to put 1 million to work without too much slippage or impact on IV.
<<<<< From your other post, I've never read of anyone exclusively using option BUYING strategies in a successful hedge fund. There are probably a few out there, but I would agree this area is unexploited...and very tough!!! Good Luck.>>>>>>
That was just one type of trade for a particular scenario which is a partial directional bet and mostly volatility bet. I don't envision exclusive option buying. This is all preliminary right now, but I envision a more or less market neutral portfolio. 30% bearish trades, 40% neutral trades, and 30% bullish.
The bearish trades could be anything from short stock + long call, to bear put or call spreads, or ratio spreads or backspreads.
The neutral trades would be divided 50/50 between long volatility trades such as straddles and short volatility trades such as butterflies. Probably some calendar spreads also.
Similar variety for bullish trades. Anything from the example I mentioned to speculative long calls to bull put spreads.
In summary the goal would be to be roughly delta neutral across the whole portfolio, and be a net seller of time premium.
I've been reading the boards here for awhile, and to be honest I'm surprised more people aren't drawn to options trading. In my opinion, there are three main benefits that options bring that are impossible to replicate with stocks or futures.
1. Creation of Asymmetric Outcomes - By that I mean the possibility of creating trades where if you are wrong you lose little but if you are right you make alot. This also includes the ability to adjust/roll positions to reduce risk/increase profit potential. I suppose it is possible to accomplish the same thing with stop losses and targeted risk/reward ratios but I've found in practice it just doesn't work as well
2. The ability to Profit and benefit from the passage of time - There is but one certainty in the market. Time will pass and all options will eventually lose all their time value
3. The ability to create zones/ranges of profitability that are not dependent on the ability to predict price movement with extremely high accuracy. You don't have to predict where the stock will go, just where it won't go, or that it will be more volatile then what the market expects.
Thanks for your reply
<<<<<You will need a CTA registration if you are trading commodity products of any kind, futures or futures options on indexes....as well as some others I probably forgot.>>>>>>>
But would you need it if you were only trading equity options? I can't seem to find an authoritative answer anywhere. Right now, I don't see myself trading futures, options on futures, or commodity options.
<<<<<<<The second question is bit tougher to answer. Many funds are closed and don't have disclosure documents posted on the web. As far as exclusively using equity options as a strategy, I would guess very few could effectively use this strategy exclusively. Once you get any real money under management, it seems like it could be tough to deploy millions in just equity options.>>>>>>>>>>
This is a good point which I've partially explored/worked the numbers on. I guess it depends on what you mean by "real money". You certainly couldn't run a 500 million fund exclusively with equity options but I think 10-50 million is definitely doable. Assume 50 million with a 2% position. That is 1 million. I think the equity option markets, especially for large cap stocks with high volume are deep enough and liquid enough to put 1 million to work without too much slippage or impact on IV.
<<<<< From your other post, I've never read of anyone exclusively using option BUYING strategies in a successful hedge fund. There are probably a few out there, but I would agree this area is unexploited...and very tough!!! Good Luck.>>>>>>
That was just one type of trade for a particular scenario which is a partial directional bet and mostly volatility bet. I don't envision exclusive option buying. This is all preliminary right now, but I envision a more or less market neutral portfolio. 30% bearish trades, 40% neutral trades, and 30% bullish.
The bearish trades could be anything from short stock + long call, to bear put or call spreads, or ratio spreads or backspreads.
The neutral trades would be divided 50/50 between long volatility trades such as straddles and short volatility trades such as butterflies. Probably some calendar spreads also.
Similar variety for bullish trades. Anything from the example I mentioned to speculative long calls to bull put spreads.
In summary the goal would be to be roughly delta neutral across the whole portfolio, and be a net seller of time premium.
I've been reading the boards here for awhile, and to be honest I'm surprised more people aren't drawn to options trading. In my opinion, there are three main benefits that options bring that are impossible to replicate with stocks or futures.
1. Creation of Asymmetric Outcomes - By that I mean the possibility of creating trades where if you are wrong you lose little but if you are right you make alot. This also includes the ability to adjust/roll positions to reduce risk/increase profit potential. I suppose it is possible to accomplish the same thing with stop losses and targeted risk/reward ratios but I've found in practice it just doesn't work as well
2. The ability to Profit and benefit from the passage of time - There is but one certainty in the market. Time will pass and all options will eventually lose all their time value
3. The ability to create zones/ranges of profitability that are not dependent on the ability to predict price movement with extremely high accuracy. You don't have to predict where the stock will go, just where it won't go, or that it will be more volatile then what the market expects.
MD,
You do not need a CTA to trade equity options. However, depending on the state you're in and the number of accounts etc... you may need a Registered Investment Advisor registration. You could probably do the IB F&F acct and keep it to under 15 accts to start. This requires your customers to give you power of attorney over the accts. Check with Wes from GTT to be sure of the above as I'm certainly not properly qualified to give you REAL advice!!!!
Sounds like you have discovered the magic of options and your statements are correct about price movement and the passage of time. It's still a lot of work, but a different game and a very rewarding one if you want to put in the time and effort to understand all of the nuances.
You do not need a CTA to trade equity options. However, depending on the state you're in and the number of accounts etc... you may need a Registered Investment Advisor registration. You could probably do the IB F&F acct and keep it to under 15 accts to start. This requires your customers to give you power of attorney over the accts. Check with Wes from GTT to be sure of the above as I'm certainly not properly qualified to give you REAL advice!!!!
Sounds like you have discovered the magic of options and your statements are correct about price movement and the passage of time. It's still a lot of work, but a different game and a very rewarding one if you want to put in the time and effort to understand all of the nuances.
Most good advice costs money. I would definately not rely on a message board for legal advice.
Take a look at
http://www.greencompany.com/HedgeFunds/index.shtml
There is a ton of free info there for ya. Otherwise, it may make sense to spend a few hundred dollars for a retainer and an hour with a qualified professional.
As for options, I had never used them much besides buying long dated OTM puts on stocks I thought would blow up. You will be wrong 80% of the time, but every once in a while you catch an EDS and make a few thousand %.
As i look into it more, options really do look interesting. Especially with the new VIX contract. There will be tons of interesting opps.
I ran across this site last week and it is pretty interesting.
http://www.cboe.com/TradTool/OptionCalculator.asp
You can play with the variables without spending on expensive software.
Take a look at
http://www.greencompany.com/HedgeFunds/index.shtml
There is a ton of free info there for ya. Otherwise, it may make sense to spend a few hundred dollars for a retainer and an hour with a qualified professional.
As for options, I had never used them much besides buying long dated OTM puts on stocks I thought would blow up. You will be wrong 80% of the time, but every once in a while you catch an EDS and make a few thousand %.
As i look into it more, options really do look interesting. Especially with the new VIX contract. There will be tons of interesting opps.
I ran across this site last week and it is pretty interesting.
http://www.cboe.com/TradTool/OptionCalculator.asp
You can play with the variables without spending on expensive software.