Performance

Optimum Income Program

TEOW Program

Investment Objective and Strategy

The investment objective of the Optimum Income Program is to conservatively generate income and growth.  This objective is achieved by selling short-term call and put spreads on the S&P 500 Index futures contract (“S&P”) at strike prices that are significantly out-of-the-money that have a high probability of expiring worthless.

Investment Philosophy

Our investment philosophy is that capital preservation and consistent returns are the most significant factors in successful asset management.  Therefore, loss of opportunity is preferable to loss of capital.  We believe that exogenous, “black swan” type events must be expected and planned for in an option strategy and that proper risk management tools must be employed AT ALL TIMES that an account is exposed to this type of risk.

We believe in taking calculated risks; that opportunity presents itself, and profits can be made, in rising or declining market environments; that it is difficult to determine the direction of the market with accuracy or precision, which, in the case of a long or short stock position, is required for profit.   Accordingly, our investment protocol is designed to be free from directional bias and exhibits market neutral characteristics.

OI Program Features

High Probability Trading
           
            By selling low-probability, close-to-maturity options that are significantly out-of-the-money, a high probability exists that the majority of options will expire worthless and option income will be made.  Option trading is a game of probabilities and statistics; by using our proprietary probability calculators and technical indicators, as well as understanding the overall structure of the markets (balance, excess, time frames behind the current trends etc…) in which we trade, we have been able to skew the statistics in our favor.  Generally, we assume less than a 5% statistical risk that our strike prices will be reached.

High Margin for Error
                       
            By selling call spreads at strike prices significantly above and put spreads at strike prices significantly below the current market price of the S&P, a sizable margin for error is established because it allows for a large percentage move on the S&P before it reaches our predetermined strike prices. Furthermore, when initiating an option strangle trade and simultaneously selling both put and call options, we expect to profit on the opposite side of the strangle, regardless of whether our call or put options get exercised.

Why the S&P 500?

            Options are less likely to get exercised when volatility is within reason and not at extremes.  We use the S&P as the underlying investment vehicle because it is comprised of 500 of the largest stocks that make up the U.S. economy and is, therefore, less volatile than most individual stocks and commodities. 

Short Time Horizon

            Generally, we trade short term options because it is easier to forecast the potential move in the S&P over a two to three week time frame than it is over a three to five year time frame, which is the time horizon most money managers use as their holding period for stocks.

Sell Discipline

            Strike prices are determined by applying proprietary technical tools to price charts on the S&P to define long-term support and resistance levels.  Timing on the sell of option trades is a key factor in maximizing profits.  We generally sell call option spreads when volatility levels are low and put option spreads at or near peak volatility levels.  The perceived volatility of the market causes option premiums to become excessive which favors option sellers.  Our proprietary technical indicators are designed to help us enter option trades at a time when option values are potentially overpriced.

Risk Management

In addition to only selling short-term index options that are significantly out-of-the-money, the following risk mitigation measures are utilized to lessen the probability of assignment:

• Credit Spreads.  THE PROGRAM DOES NOT SELL NAKED OPTIONS.  Every short option is offset by an equal position of a long option at a strike price beyond the short option.  This allows us to eliminate the risk of unlimited loss of capital on any position. In the event of a major catastrophe and/or abrupt market decline, the maximum loss will be limited to the difference between strike prices of the short and long options that make up the spreads.
  A credit spread is an alternative option writing strategy which involves selling or “writing” an option and also purchasing another option on the same underlying security. The option that is written is sold at a higher price than the cost of the option that is purchased, thereby creating a credit. Unlike writing uncovered options, where the potential for unlimited loss exists, the maximum loss is limited to the amount of the difference between the strike prices of the two options in the spread. Any loss would be further reduced by the amount of the credit received, less commissions and fees.

• Ratio Spreads.  In the event the market comes within a certain percentage of our strike price, we may buy back the short options and sell a multiple of options further out-of-the-money.  This technique lessens the probability of assignment by creating a larger margin for movement of the underlying S&P.

• Laddered Strikes.  To diversify our risk, we may sell options at various strike prices. This approach lessens the risk exposure to, and assignment effects from, one specific strike price.

• Leverage.  Using less leverage than what is allowed offers greater flexibility because it can provide the excess margin capacity that may be needed to execute trades to prevent assignment and reduce the magnitude of a loss in the unlikely event of assignment. Initial leverage of our standard program is usually between 10-15% of account value.

• 24 Hour Monitoring.  We virtually monitor the markets 24 hours a day, 7 days a week, making sure we are ready and able to execute a trade if a situation warrants immediate action. Installed in the homes and mobile devices of our investment managers are the same technologies and market alert systems that are used in our offices. 

Past results are not necessarily indicative of future results.
Commodity Trading Involves Substantial Risk of Loss