Cervino Capital Management cervino.altavra.com

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Disclosure Statement     Disclosure Document     Management Agreement     Download Page     Print Page

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Manager Name Cervino Capital Management Program Name Diversified 1X, Diversified 2X, Gold Minimum Investment 25,000 to 50,000 USD

Strategy Premium Writing Markets Stock Indices, Currencies, Interest Rates, Gold Restrictions None

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PLEASE NOTE: ALTAVRA does NOT charge a load, upfront or initial fee on any account. Online Account Application: open.altavra.com / Account Forms: forms.altavra.com / Manager Shortcut: cervino.altavra.com

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Download Brochure: Gold Covered Call Writing Program

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Program Description: Overview of Advisor's Methodology

Cervino Capital Management currently offers three separate investment programs: Diversified Options Strategy 1X, Diversified Options Strategy 2X, and a Commodity Options Program. Each investment strategy involves trading in derivatives and is intended primarily for sophisticated investors. The overarching goal of the Cervino Capital Management's money management services is the capital appreciation of its clients’ investments through speculation mainly in exchange traded derivative contracts such as futures and options on futures. No assurance can be given that this objective will be met, and any investments in an account to be traded by Cervino Capital Management should only be considered by investors that can assume the significant risk of trading futures and options on futures, including losses in excess of their initial investments.  Cervino Capital Management will attempt to meet the objective of capital appreciation for this investment program by making trading decisions based upon proprietary trading methodologies. 

Cervino Capital Management generally relies on fundamental, technical or quantitative analysis, or a combination of each, in making trading decisions and attempting to anticipate price movements.

Fundamental analysis looks at the factors that affect the supply and demand of a particular commodity or financial asset in order to predict the expected market price for that asset. Such factors include, but are not limited to, government actions (e.g., Federal Reserve discount rate, imposition of embargoes, price controls, etc.), the release of information concerning weather conditions (e.g., reports of frost in certain growing areas), or the release of economic statistics (e.g., Consumer Price Index, Housing Starts, Unemployment Rate, etc.) resulting in actual or probable significant price movements. 

Technical analysis is not based on the anticipated supply and demand of the cash (actual) commodity or financial asset; instead, it is based on the theory that a study of the movement of markets themselves will provide a means of anticipating future prices. Technical analysis often includes the study of intra-day, daily, weekly, and monthly prices, volume and open interest data, and utilizes charts and/or computers for analysis of these items. Another type of technical analysis is market sentiment which is based on the theory of contrary opinion and assumes that when investors swing to emotional extremes they are likely to be overreacting. Sentiment indicators such as short sales or put and call activity is used to highlight junctures of bullish excess (overbought) and bearish excess (oversold), which are useful leading indicators of trend exhaustion.

In addition to fundamental and technical analysis, trading decisions may be based on quantitative analysis, a technique that seeks to understand price behavior by using complex mathematical and statistical modeling, measurement and research. For example, since an option’s price is a function of its strike price, time to expiration, underlying asset’s price and volatility, and short-term interest rates, it is logical that a formula can calculate option prices from these variables.  Therefore, utilizing statistical analysis, a model of price variation on a particular futures contract may be used to theoretically determine the fair value of an option on such futures contract.

In developing its market opinion and evaluating potential trades, Cervino Capital Management generally uses a blended combination of mechanical signals and subjective interpretation of fundamental studies, technical and sentiment indicators, as well as statistical probability analysis. This research includes, but is not limited to, continuous analysis of short- and long-term price series, the impact of seasonal and cyclical price movements upon the underlying price trend, fundamental factors affecting supply and demand influences, and application of statistical models in order to consider risk factors associated with various trading opportunities. The intent is to identify and arbitrage price discrepancies that reflect under- and over-valuations as well as directional trend bias or trend-reversal/mean reversion opportunities, and to produce a replicable trade execution process consisting of positions with statistically high probabilities of positive outcomes. To accomplish this goal, the Advisor utilizes options to structure complex positions that within one or across several underlying asset exposures can tactically reflect one or more trading perspectives, such as hedged relative value, fundamentally-based, or volatility/opportunistic investment strategies. 

Risk control is achieved through a variety of means which should in most, but not necessarily all, market conditions help minimize the impact of drawdowns. The first is portfolio constructions and diversification such as the use of hedged positions across several underlying assets; second is controlling leverage through position sizing adjusted according to account size, market volatility and risk-reward analysis; and third is stops based on money management rules. Risk management is deemed to be an ongoing process and therefore the Advisor continually monitors all positions.  Occasionally Cervino Capital Management may adjust positions either by entering into new positions which hedge existing market exposure, or by liquidating and/or covering existing positions in order to reduce market exposure or reset a position at different strike price(s) and/or contract expiration(s).

Prospective investors should be aware that Cervino Capital Management's trading programs may be more aggressive than most other trading programs. This is due to the fact that the Advisor's trading strategy primarily utilizes options on futures, and the Advisor will typically adjust its positions on a regular basis. As a result, it is anticipated that the velocity, or turnover rate, may be substantially higher than the turnover in other money management programs. Accordingly, Cervino Capital Management's trading strategy can result in substantially greater commission charges that may rapidly deplete the equity in a client's account in the event the Advisor's strategies are not successful.  The trading methods employed by the Advisor may be profitable overall, however, there may be periods in which such trading methods may result in substantial trading losses.

Cervino Capital Management’s Diversified Options Strategy 1X and 2X involve trading in a diversified portfolio of option on futures contracts including options on equity index futures. Diversified Options Strategy 1X is a baseline program and the past performance of this program is set forth in Section 7 Performance. Diversified Options Strategy 2X is leverage at two  times the Diversified Options Strategy 1X program; in other words, the 2X program will trade twice as many contracts as the 1X program for the same nominal account size. Accordingly, the additional leverage of the 2X program is expected to result in increased account volatility, and therefore an increased potential for higher returns as well as an increased potential for larger drawdowns. 

These programs are designed to be an absolute return program focused mainly on premium capture strategies with the objective of generating positive returns in most market conditions regardless of whether the underlying market(s) is up or down. Both of these programs focus their trading activities on a portfolio of options on futures contracts diversified across a variety of underlying financial assets. Opportunity and risk exposure is further diversified through the use of different types of option combinations including, but not limited to, bear spreads, bull spreads, condors, ratio spreads, strangles and calendar spreads as well as naked puts and calls. The variety of position combinations that are possible with options contributes to the creation of multifaceted and versatile investment strategies tailored to market conditions and trading outlook. Generally, both the Diversified Options Strategy 1X and 2X are counter-trend biased in the sense that these programs will, for example, write calls into rallies and write puts into declines. While Cervino Capital Management will utilize mechanical signals as a component of its investment process, unlike certain technical traders the Advisor does not purely follow any systematic entry and exit signals in implementing its trading strategy for Diversified Options Strategy 1X and 2X. Rather, there is a significant element of discretion involved with Advisor’s formulation and execution of its trading ideas for these programs.

The underlying asset classes and futures contracts upon which both the Diversified Options Strategy 1X and 2X focus their options trading consists primarily of the S&P 500 equity index, with additional portfolio exposure, but to a lesser degree, in currencies (e.g., Euro, Yen), and U.S. Treasuries (e.g., 10 Year U.S. Treasury Note) and precious metals (e.g., gold, silver). In addition, the Advisor may for accounts funded with Actual Funds (see Section 2.5 Broker, Account Size, and Funding) invest in fixed income securities that are fungible for margin purposes. The aforementioned list of underlying asset classes is not meant to be exclusive, and Cervino Capital Management may trade in other markets in its own discretion in order to gain exposure to opportunities in the majority of actively traded markets, and to achieve a balance across economic sectors while simultaneously limiting, to the extent possible, undue concentration in any particular economic sector. The intent of such discretion is to increase opportunities for gain, decrease risk and provide more consistent returns.

The trading strategy largely involves, but is not limited to, the implementation of option combinations such as bear spreads, bull spreads, condors, ratio spreads, strangles and calendar spreads. The writing of “naked options,” is another strategy that the Advisor may utilize from time to time. In addition the Advisor may establish outright long option positions, or establish long or short futures positions under certain market conditions. Options on futures may be used by Cervino Capital Management on both a covered basis and an uncovered basis, but in the vast majority of circumstances positions will not be “covered” by the underlying futures contract(s). Both put and call options will be traded. 

Due to the nature of Cervino Capital Management trading methods and the experience of its trading principal, the portfolio often may not be diversified; in fact, on occasion, there may be a heavy concentration of a given position or a position complex, which could result in a greater return or risk to the account. While the Advisor may utilize contingent orders such as “stop-loss” or “stop-limit” orders, such orders will not necessarily limit losses to intended amounts since market conditions may make it impossible to execute such orders.

The foregoing investment principles are factors upon which Cervino Capital Management bases its trading decisions for both the Diversified Options Strategy 1X and 2X. Such trading strategies have been and will be enhanced or revised from time to time. The research and trading methods of the Advisor are proprietary and confidential. The description of this program is, of necessity, general and is not intended to be exhaustive.

The Gold Covered Call Writing program involves a combination of long gold futures contracts and short gold call options. The Advisor intends to maintain a perpetual long gold futures position by “rolling the futures contract forward” to deferred-delivery futures contracts, and writing call options on the underlying gold futures contracts either “at-the-money,” slightly “out-of-the-money” or slightly “in-the-money.” This strategy is often referred to as “covered call writing.” If the futures contract is purchased simultaneously with writing the call option, the strategy is commonly referred to as a “buy-write.” If the futures contract is already an established position, it is commonly referred to an “overwrite.” In either case, the long futures contract fully collateralizes or “covers” the obligation conveyed by writing a call option contract.

Though the covered call can be utilized in any market condition, it is most often employed when the investor, while bullish on the underlying asset, feels that the asset’s market value will experience little range over the lifetime of the call contract. The investor desires to either generate additional income apart from appreciation in the value of the underlying asset, and/or provide a limited amount of protection against a decline in the underlying asset value. While this strategy can offer limited protection from a decline in price of the underlying asset and limited profit participation with an increase in asset’s price, it generates income because the investor keeps the premium received from writing the call. At the same time, the investor benefits from maintenance of a long futures position in gold which is considered a “reserve asset,” unless assigned an exercise notice on the call and is obligated to sell the futures contract. The covered call is widely regarded as a conservative strategy because it decreases the risk of asset ownership.

Maximum profit for the covered call strategy occurs when the underlying asset is at or above the call option's strike price, either at its expiration or when a written call is assigned an exercise notice before it expires. The risk of financial loss with this strategy comes from the long gold futures position. This loss can become substantial if the gold futures price continues to decline in price as the written call expires. At the call's expiration, loss can be calculated as the current market price of the gold futures contract less its original purchase price, plus the premium received from initial sale of the call. Any loss accrued from a decline in the gold futures price is partially offset to the extent of the premium received from the written call option.

While managing the Gold Covered Call Writing program, the Advisor’s opinion in the underlying position, whether more bullish or more bearish, may change before the call option expires. It is anticipated that in order to increase the upside potential of the program, when the underlying gold futures contract goes “into-the-money,” the Advisor may at its discretion “roll” the covered call up and “overwrite” the option a higher strike price, or re-establish the strategy using a different delivery date futures contract and option series. Alternatively, if the underlying gold contract declines in price and the premium in the covered call option also declines, thereby reducing the effectiveness of the call option hedge, the Advisor may at its discretion “roll” the covered call down and “overwrite” the option a lower strike price, or re-establish the strategy using a different delivery date futures contract and option series. Under certain circumstances, the Advisor may decide to “collar” the underlying gold futures position by purchasing a put option in order to protect the long gold position from further decline. This is known as a “married put” position.

Investors in the Gold Covered Call Writing program should be aware that assignment on written options is always possible. As expiration day for the call option nears, the Advisor will need to consider different scenarios depending on whether the option is in-the-money, at-the-money or out-of-the-money. If the option is in-the-money at option expiration, it is highly probable that client accounts will be assigned an exercise notice on the written option and will be required to deliver the underlying futures position at the option’s strike price. If the written option expires exactly at-the-money, assignment of an exercise notice on such a contract is possible, but should not be assumed. If the written option expires out-of-the-money, no action is necessary since it is unlikely that an exercise notice will be initiated. Under each of the scenarios described above, the Advisor at its discretion may choose to close out the option position with a closing purchase transaction prior to option expiration. It should be noted that since the Advisor does not control which client accounts are assigned an exercise notice, it is possible that some accounts may receive an assignment while other accounts do not. Under such circumstances, the Advisor will take appropriate action to realign positions in client accounts as quickly as possible.

The foregoing investment principles are factors upon which the Advisor bases its trading decisions for the Gold Covered Call Writing program. Such trading strategies have been and will be enhanced or revised from time to time. The research and trading methods of the Advisor are proprietary and confidential. The description of this program is, of necessity, general and is not intended to be exhaustive. As of the date of this Disclosure Document, the Advisor previously has not directed any accounts in the Gold Covered Call Writing program.

For additional information on the Gold Covered Call Writing Program, please download the detailed program explanation.