Options Strategy for Professional Clients

Transcription

1 Options Strategy for Professional Clients

2 Optimise is an options strategy which uses market volatility selling FTSE100 cash settled options contracts. Premium is taken from the market on options that are Out of the Money, the premium is income to derive Absolute Returns for our clients. This strategy is packaged as a spread bet so clients do not have to pay tax on capital gains. * *Subject to tax laws changing.

3 Introduction 1 About Collins Sarri Statham Collins Sarri Statham Investments (CSS) is an independent and privately owned stockbroking firm, founded by its three partners, based in the City of London. Founded in 2008, we have won several industry awards for our innovative advisory services and research. We have broadened our product and service range to meet diverse and increasingly particular client requirements. We pride ourselves on our client focus, recognising that clients are often busy and time constrained. We are different because we take the weight, reducing the time you need to spend on investing decisions. We have pooled a team of experienced, exceptionally talented brokers, analysts and senior industry practitioners, who draw on their unique experience to deliver a professional trading experience for clients. We approach our clients keeping in view our founding and governing principles: Achieving our clients investment objectives via outstanding client focus, teamwork and integrity whilst managing our clients expectations. Providing multi-asset advice and execution on Industry leading trading platforms. Taking a conscientious and dedicated approach that builds an atmosphere of trust and pride in our work. What is Optimise Targeting? To provide an Absolute Return for clients whatever the market conditions. Many in the financial services industry rely on providing good relative returns, hence if the targeted bench mark goes up then a broker would aim to beat that and if the benchmark goes down then the broker aims to have the portfolio go down less. Remember, an investor who bought a FTSE 100 tracker in December 1999 at would today be still nursing big losses not only on the product itself but also potentially on Total Expense Ratio (TER), tracking error and inflation. Absolute return targets making a positive return whatever the direction of the market. This means targeting a positive return when the market goes down and a positive return when the market goes up. Although it is inevitable that the strategy will be compared to the performance of the FTSE 100 benchmark, in technical terms, we chase Alpha (in this case a return in excess of the cash rate) whilst minimising Beta (susceptibility to market movements). Optimise should therefore be compared to the cash rate. What Type of Investor Would Benefit? Investors searching for absolute return through remaining market neutral (make gains in falling and rising markets). Those targeting smoothed and regular gains each month. Investors requiring tax free gains. 2 Investors desiring to take advantage of the current choppy market conditions and be proactive. Clients needing to diversify their portfolios away from just shares, property, cash and bonds. 1. Correct at time of going to press. 2. Subject to tax laws changing.

4 Background behind Options 2 What are Options? The general concept of an option has been around since the earliest of times. Some early writings tell us about a man that purchased the right to use olive presses. It was mid-winter, and the owner of the olive presses was happy to sell the right to use the olive presses during the harvest season. It generated income for the olive press owner during the off season. The man purchasing the rights ensured that he would have use of the presses during the busy season. If the olive harvest was really good, the purchaser might be able to even resell his right to use the olive presses for a profit. The use of the options is the same. The option is a contract between a buyer of the options and the seller of the option. The buyer purchases the right to buy something. The seller obligates him or herself to deliver some item or perform some service. Birth of the Modern Option In 1973, the modern financial options market came into existence. The Chicago Board of Trade (CBOT) opened the Chicago Board Options Exchange (CBOE). The CBOE instituted a new exchange traded options contract. This contract was standardised in its terms and conditions. An options buyer and seller no longer had to sit down and negotiate terms of the contract every time he or she sought to buy an option. Thus, the CBOE could publish quoted options prices for the first time, and could establish a market maker system to make sure that there was a secondary or resell market for options. At the same time, the Options Clearing Corporation was formed to make sure that the contract would be honoured by all members. Lastly, the whole process came under the regulatory control of the Securities and Exchange Commission. In 2007, there were over 2.8 billion contracts cleared by the Options Clearing Corporation. Thus, the trading of the modern option, exchange traded options contract had begun. On the first day the contracts traded, April 26, 1973, a total of 911 contracts were traded. Since that time, options trading has grown enormously. In 2007, there were over 2.8 billion contracts cleared by the Options Clearing Corporation.* Options are now widely traded in variety of financial instruments: from stocks and bonds to exchange-traded funds, commodities and currency futures. *Source: Options Clearing Corporation

5 How Options trading works 3 Theory of the Strategy Options can be explained as insurance policies for major fund and asset managers against big falls or rises in the market thereby hedging their portfolios. More simply, if you have a car, you need to insure the car for what you hope is an eventuality that will never happen. If it does then you claim on your insurance. To purchase an insurance policy you pay a PREMIUM to a market participant (in this case an insurance company) who will pay out if the remote possibility happens and you have a accident. Optimise works in much the same way, as the client is the insurance company, insuring all the motorists against accidents that are not very likely to happen. Selling options (puts and calls) on the FTSE100 at suitable levels that the FTSE100 is unlikely to achieve before expiry. If options expire worthless then the premium is retained. This strategy therefore sells options that are out of the money and therefore have only time value. Writing an Option Profit Writer FTSE 100 Index 4500 Put 5400 Strike Max Profit = Premium FTSE 100 Index in Month X Loss Profit Writer FTSE 100 Index 4500 Call Max Profit = Premium 5400 Strike FTSE 100 Index in Month X Loss

6 How Options trading works 4 Theoretical Trading Month Based on a client with a capital amount of 100,000 and the 5500 level. 1. Sell 20 lots of Premium 4p So (20 calls = 200 spread bets) 200 x 4p = Sell 20 lots of Premium 6p So 200 x 6p = Sell 20 lots of Premium 8p So 200 x 8p = Sell 20 lots of Premium 6p So 200 x 6p = 1200 With 1) This trade says the market will not rise from 5500 to 6000 in one month which would be a 9% rise and the market is prepared to pay me 800 on a 120,000 bet. With 3) This trades says that the market will not fall from 5500 to 5100 which would be a 7.2% fall and the market is prepared to pay me 1600 on a 102,000 bet If all Options Spread bets expire worthless then total gain = 4800 or 4.8% on month CSS takes only 20% of monthly gains so the client retains If there is no performance, there is no profits share. Client profit = Client account value = 103,840. This is a theoretical month s trading. Markets change constantly and this strategy uses statistical and technical analysis, market timing and the strategy manager s experience. Normally CSS would expect to do no more than 4 trades per month.

7 Why CSS? 5 Biography Nicholas Eastham BA (Hons.) MCSI conceived and oversees the Optimise strategy. Nicholas graduated with a 2:1 in International Business Studies and is a fluent French speaker. He started his career in financial services at Beaufort Securities (formerly HB Markets) in 2005 and joined Collins Sarri Statham in He has specialised in equities and derivatives throughout. Nicholas Eastham BA (Hons.) He attained a merit in CISI Private Clients Investment Advice and Management and is a holder of Investment Management Certificate. Strategy Overview Trading only Out of the money options, both puts and calls on the FTSE100. Using market timing to get the best entry prices (premium). Trade options as spread bets making the strategy Capital Gains Tax Free. * No more than 5.5 x leverage on trading at any one point in time. Target smoothed earnings, through a regular and often approach. Average about 4 trades per calendar month. Losses to be managed through use of strict risk management techniques. * Subject to tax laws changing. We have pooled a team of experienced, exceptionally talented brokers, analysts and senior industry practitioners, who draw on their unique experience to deliver a professional trading experience for clients.

8 How to start trading 6 Your Optimise Account We use GFT as our options spread bet provider, they are one of the world leaders in spread betting and CFD trading. Established since 1997 have grown to become leading providers of contracts for difference, FX and spread betting. CSS doesn t hold any client funds. Fees and Charges The charging structure is 2% and 20% The administration fee for the account is 2% per annum charged monthly on the account balance at the end of each month (account value x 0.02/12). Profit sharing is charged at 20% of gains on each monthly expiry date (3rd Friday of every month). CSS only charge for performance, if there is no gain then there is no profit share. The Next Steps 1. Contact Nicholas Eastham, the Portfolio Manager on and you will be guided through the account management process. 2. Your application will be subject to normal credit checking procedures. 3. We recommend you obtain and read a copy of the spread betting guides provided by GFT prior to entering into an agreement to open an account.

9 Risk warnings 7 No Recommendations Collins Sarri Statham Investments Ltd (CSS) does not in any of its Publications take into account any particular recipient s investment objectives, special investment goals, financial situation, and specific needs and demands. Therefore, all CSS Publications are, unless otherwise specifically stated, intended for informational and/or marketing purposes only and should not be construed as: Business, financial, investment, hedging, legal, regulatory, tax or accounting advice, A recommendation or trading idea, or Any other type of encouragement to act, invest or divest in a particular manner (collectively Recommendations ). CSS shall not be responsible for any loss arising from any investment based on a perceived Recommendation. Notwithstanding anything to the contrary (not even if specifically stated), no Publication (including possible Recommendations ) shall be construed as a representation or warranty (neither express nor implied) that the recipient will profit from trading in accordance with a trading strategy set forth in a Publication or that the recipient will not sustain losses from trading in accordance with a trading strategy set forth in a Publication. Risk warning Trading in the products and services offered by Collins Sarri Statham Investments Ltd (CSS) may, even if made in accordance with a Recommendation, result in losses as well as profits as the value of investments may rise or fall due to the volatility of world markets, interest rates and capital values. In addition, you may not get back the original amount that you invest because of, for investments held in overseas markets, the effect of changes in currency rates of exchange and, for leveraged products such as Contracts for Difference (CFDs), derivatives, commodities & Foreign Exchange (FX), the high risk to your capital by losing rapidly & substantially more than your initial investment. Speculative trading is not suitable for all investors. Any mention, if any, in a Publication of the risks pertaining to a particular product or service may not and should not be construed as a comprehensive disclosure nor full description of all risks pertaining to such product or service and CSS strongly encourages any recipient considering trading in its products and services to employ and continuously consult suitable financial advisors prior to the conclusion of any investment/transaction. General risk warning The market information relating to past performance of an investment is not necessarily a guide to its performance in the future. The value of the investments or income from them may go down as well as up. As stocks and shares are valued from second to second, their bid and offer value fluctuates sometimes widely. The value of investments may rise or fall due to volatility of world markets, interest rates and capital values or, for investments held in overseas markets, changes in the rate of exchange in the currency in which the investments are denominated. You may not necessarily get back the amount you invested. Please note that Small caps carry higher investment risk than established companies. These types of Shares may be suitable for some investors but they are not for everyone. Please also note that there can be a big difference between how much you pay for the Shares and how much you can sell them for and if you want to sell them, it can sometimes be difficult to find a buyer. Also, Shareholder influence can sometimes be limited because the majority of the Shares may be closely held (e.g. company directors). Publicly available information may be less comprehensive than that provided by listed companies, so you may be unable to assess the business and its finances in any great depth. Finally, there is increased risk of losing some or all of the money invested.

10 Risk warnings 8 CSS Optimise risk warning The CSS Optimise Options Strategy is only appropriate for those categorised as Professional clients because, being a complex form of financial spread betting, it is only appropriate for those who can demonstrate having the relevant experience, knowledge and understanding of such products. Any clients categorised as Retail rather than Professional must recognise that this product is not appropriate for them but, should they wish to learn more, can contact CSS concerning being re-categorised as a professional client. Professional Client Disclaimer & Warning As a Professional Client, CSS assume that you: Have the necessary experience and knowledge in order to understand the risks involved in relation to the particular investment services/transactions/types of transaction/product you have requested. Understand that when CSS make any recommendations to you that they will assume that you are in a position to judge the suitability of the given advice and understand the risks involved in following such advice. Understand that you are responsible for keeping CSS informed about any changes that could affect your categorisation as a professional client and to do so promptly and clearly where these include notification of changes in your personal situation. Understand that CSS will continue to tailor risk warnings to you, making them less detailed and therefore shorter than those CSS would provide to retail clients. Understand that, as a consequence of being categorised as a professional client, you have lost some of the protections afforded to retail clients. Have the financial circumstance to bear any related investment risks.

11 Collins Sarri Statham Investments Ltd. 6th Floor 5 Lloyds Avenue London EC3N 3AE Tel +44 (0) Fax +44 (0) optimise@css-investments.com Collins Sarri Statham Investments Ltd. is authorised and regulated by the Financial Conduct Authority Registration No Registered in England and Wales Company No