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Arborvitae Capital Management
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Access This Page Directly:
http://arborvitae.altavra.com
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Program Descriptions
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Uncovered Option Strategy
The objective of this strategy is to achieve
capital appreciation through the
speculative trading of options on futures contracts.
This objective can entail a comparatively high level
of risk. ACM currently engages in the strategy of
selling or “writing” put and call options on stock
index futures, metals and energies in the Options
Program. ACM may trade any commodity future and
option contracts on any United States exchange.
ACM uses a systematic approach to trading, in that
it relies heavily on a program of selling or
“writing” out of the money options. ACM may also,
from time to time; purchase options to reduce risk
exposure (see Credit Spread Strategy). The
implementation of the program each month depends on
two proprietary formulas. They determine the strike
prices and maturity periods of the initial
option positions, which are written for each month’s
expiration. Considerations are also given to
technical and fundamental conditions in order to
give the best risk/reward possible in ACM opinion.
Option contracts are written at a sufficient
distance out of the money to allow, in most cases,
for the options to expire worthless.
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Credit Spread Strategy
An alternative option writing strategy is the
credit spread,
which involves selling an option (see uncovered
option strategy) but also includes purchasing
another less expensive option. When writing a credit
spread the writer is “credited” the difference
between the premiums collected from writing the
option, less the cost of the option purchased.
Unlike writing uncovered options, where the
potential for unlimited loss exists, option credit
spread risk is absolutely limited to the difference
between the strike prices of the options written and
purchased, plus commissions and fees. Any loss would
be further reduced by the amount of the credit
received. While the option credit spread
clearly offers the advantage of limited risk, the
writer must sacrifice some of their potential profit
in exchange for acquiring a limit to the risk.
ACM seldom initiates a credit spread, but instead
uses the credit spread strategy to
reduce risk and margin on uncovered option
positions.
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S&P Call Credit Spreads
An S&P futures credit spread involves selling an
option at a greater premium than the cost of the
option that is purchased, thereby creating a credit
to the trader writing the spread. A call credit
spread consists of writing a call and buying another
call, which has a higher strike price and therefore
is cheaper than the one written. If a call spread is
not closed prior to expiration, then upon
expiration, the strategy will be profitable if the
underlying S&P 500 futures price is below the strike
price of the call that was sold. If the S&P 500
futures price rises above the strike price of he
written call at expiration, the strategy will
produce a loss. Thus, the profitability of a trading
strategy that focuses on credit spreads on the S&P
500 futures contract depends upon the underlying
price movement of the S&P 500 futures contract. In
credit spreads, the loss is limited to the amount of
the difference between the strike prices of the two
options in the spread. For example, if a call with a
strike price of 600 is written and a call with a
strike price of 625 is purchased, the maximum loss
on the spread is 25 points, minus the original
credit of the spread. If the spread was originally
put on for a credit of 5 points, the maximum profit
generated, assuming the spread expires
worthless, would be 5 X $250 (cash value of each
full point in an S&P option contract) = $1,250. On
the other hand, the maximum possible loss is
25 X $250 = $6,250 minus the original $1,250 credit,
or $5,000, plus commissions and fees.
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S&P Put Credit Spreads
A put spread on the S&P 500 future involves writing
a put and buying another put which has a lower
strike price and is therefore cheaper than the one
sold. If the spread is not closed out prior to
expiration, the strategy will be profitable if the
S&P 500 futures price is above the strike price of
the put written when the spread expires. If the
futures price of the index is below the strike price
of the put when the put that was written expires,
the strategy will produce a loss. The loss will be
limited to the amount of the difference between the
strike prices of the two options in the spread. For
example, if a put with a strike price of 850 is
written and a put with a price of 825 is purchased,
the maximum loss on the spread is 25 points, minus
the original credit on the spread. If this spread
were originally put on for a credit of 5 points, the
maximum possible loss is 25 X $250 = $6,250 minus
the original $1,250 credit, or $5,000 plus
commissions and fees. The maximum profit potential
would be calculated the same as described in the
previous paragraph.
Both the call and put examples given above are
hypothetical and for illustration purposes only. The
actual difference between strike prices actually
used by ACM may be greater or less than the ones in
the example.
Please note; Options and option credit spreads can
be liquidated before expiration with
either a profit or loss, based on market movement.
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Management Information
Ruben Zagagi is the President of ACM, Inc. Mr.
Zagagi is directly responsible for all trading and
money management decisions made by ACM. Performance
of accounts managed by Mr. Zagagi can be found in
the disclosure document.
Mr. Zagagi received an MBA in Finance and Accounting
from the University of Tennessee in 1989. Prior to
entering the trading and management business, Mr.
Zagagi was involved in IT and financial management
consulting. Mr. Zagagi has worked for IBM, whose
line of business is information technology
consulting, since February 2001 in the capacity of a
managing consultant. In that capacity, Mr. Zagagi
managed IT projects in various industries. Mr.
Zagagi has been trading since 1981 and has done
extensive research in the development of proprietary
formulas for use in the trading of options on
futures. Mr. Zagagi has been registered with ACM as
an associated person since June 2, 2008 and as a
principal since May 29, 2008. Mr. Zagagi’s
trading results in his proprietary accounts can be
found on page 21.
ACM and its President may trade commodity interests
for their own accounts; the records of such trading
and any written policies relating to such trading,
will not be made
available to clients for inspection.
The
descriptions above
are from the manager’s disclosure document.
THE
RISK OF LOSS IN TRADING FUTURES, OPTIONS AND
OFF-EXCHANGE FOREX
CAN BE SUBSTANTIAL. PAST RESULTS ARE NOT
NECESSARILY INDICATIVE OF FUTURE RESULTS. PLEASE READ THE
CTA'S RISK DISCLOSURE DOCUMENT CAREFULLY BEFORE
INVESTING MONEY.
Disclosure Statement
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