Back in March of 2007 I wrote about how the option selling funds were a blowup waiting to happen. Below is an update of their “performance”.
The time to invest in these funds is when the VIX is at all times highs (now, 70s) rather than all time lows of around 10 a number of months ago. Although I wouldn’t invest in one of these funds at all, but if I HAD to, I would examine 2 ways to gain exposure.
1. Create a FOF of option sellers. This should help to minimize impact of any one fund blowing up. However, since most funds only trade one market, large risks remain. The performance of a an equal-weighted basket of these funds is in the below table as “AVERAGE” – and you can see the performance has been deteriorating.
2. Sell options on a broad portfolio of world futures markets. Only one fund to my knowledge (and only recently) has pursued this strategy (ACE). Selling options on a broad basket of uncorrelated futures markets makes more sense to me than one single market. I did a simple backtest of this strategy a few years back, and the results were promising.
Anyone wanna guess how many of these funds make it through October?
Click on the chart to enlarge:
who is LJM? they to have a pretty strong model.
How does one invest in these funds?
LJM Partners:
http://ljmpartners.com/content/overview.html
LJM writes strangles in the S&P 500options and positions are adjusted as vols and underlying move for or against the overall position. Writes numerous strikes over time, generally, three months out and holds quite a few positions into expiration.
The model would be less sophisticated than one would think. Look at losing months back in 98 and early 2000's to see the potential losses that can be delivered. But we all know that the real potential loss is 100%++ when it comes to writing options.
Check LJM’s website for performance figures from Oct. -59%, should give you an idea how strong the model is.
I am the PM of a premium-selling fund and I’m up double-digits this year. All about the risk management and knowing when to stay on the sidelines. Too many of these guys kept doubling down with little to no risk controls.
Good job. I am glad you were able to get out of the way. Congrats on bucking the trend.