SPYGLASS TRADING, L.P.

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SPYGLASS TRADING, L.P.

• RISK-ADJUSTED RETURNS
• MANAGING VOLATILITY

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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

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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

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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

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RISK ADJUSTED RETURN STRATEGIES

• Selling the wings
• Covered writes to exit long or short stock
  positions
• Converting to strangles
• Diversification

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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

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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

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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

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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

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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

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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