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SPYGLASS TRADING, L.P.

SPYGLASS TRADING, L.P. RISK-ADJUSTED RETURNS & MANAGING VOLATILITY. TRADING MODEL. 90-95% of trades are in options Most opening positions are selling option wings expiring in the spot month Routine and systematic in equity names we know Also sell some index options

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SPYGLASS TRADING, L.P.

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  1. SPYGLASS TRADING, L.P. RISK-ADJUSTED RETURNS & MANAGING VOLATILITY

  2. TRADING MODEL • 90-95% of trades are in options • Most opening positions are selling option wings expiring in the spot month • Routine and systematic in equity names we know • Also sell some index options • Expectation is for option to expire worthless • Some short term trades using long index options or long put or call equity spreads • May execute long or short positions in stock

  3. BENEFITS • Large cash credit balances • Creates lower cost of capital for stock positions • Increased return in a range bound or gradually trending market • Do not have to be exactly right to profit • Required to frequently re-evaluate portfolio

  4. CONSEQUENCES • Event risks, e.g. mergers or crises • Substantial directional moved based on skewed market psychology • Lost profit when directional bias is correct • Potential loss in any given position can significantly exceed potential gain • Highly intense, requires constant monitoring, and may generate higher trading costs

  5. RISK ADJUSTED RETURN STRATEGIES • Selling the wings • Covered writes to exit long or short stock positions • Converting to strangles • Diversification

  6. SELLING THE WINGS • Assumes same risks as covered write position • Requires less margin • Eliminates need for market movement to make money • Sells in spot month only • Lessens time window for negative events • Increases return based on premium decay rate

  7. COVERED WRITES • Used solely as an exit strategy for long or short stock positions • Sell in-the-money puts against short stock or in-the-money calls against long stock • Benefits: • Forces elimination of the position within weeks • Captures additional gain up front • Reduces some risk of a directional change

  8. CONVERTING TO STRANGLES • Opening position in a stock or index of a short put or call • Later add a short of the opposite option • Little to no additional margin required • Risk needs to be low to be effective

  9. DIVERSIFICATION • Large number of different positions • Have to sell both puts and calls • Trade in a variety of unrelated market sectors • Utilize index options • Carry bonds, bond funds, reits, and listed funds to add stability; i.e., reduce overall portfolio risk

  10. MANAGING VOLATILITY • Roll • Same month if time and premium at desired strike • Calendar if late in month • Buy long spread • Spreads in out months • Buy same strike, sell next strike • Ratio • Buy or short sell stock • Sell in-the-money offset option • Taking advantage of volatility – an earnings play

  11. Final Thoughts • Technical versus fundamental • Time and labor intensive approach • Has the potential to under perform in strongly trending markets • Greatest risk is being out of the market

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