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Schwab Capital Advisors
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Access This Page Directly:
http://schwab.altavra.com
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Program Descriptions
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Schwab Market Neutral Program (Premium Writing)
The goal of the Market Neutral Option Writing
Program is to achieve capital appreciation with the
use of alternative investment strategies. We attempt
to obtain consistent quarterly returns that exceed
those of the equity market and to protect capital
against adverse market trends.
The trading strategy seeks to be flexible enough to
profit in rising markets as well as declining
markets. The market can move up, down, or
sideways within a specific range and still produce
profits at, or as it nears, option expiration.
Additionally, the SCA trading strategy has the
potential to perform well in any economic
environment including both inflationary and
deflationary periods (unlike stocks).
The SCA strategy primarily engages in a program of
selling or "writing" options (puts and calls) on
futures contracts on the e-mini S&P 500 Index. To a
lesser extent we may also write options on the
Treasury bond, foreign currency futures, or other
commodities to capitalize on extreme market
opportunities. In doing so, we reserve the right to
place trades in any commodity futures contract or
option contract thereon, on any
exchange, foreign or domestic, at our sole
discretion.
Generally,
we believe the futures markets follow the “Efficient
Market” theory and, consequently, do not attempt to
forecast or prognosticate market direction.
Rather, the SCA strategy utilizes options on futures
and initiates market neutral trade positions by
writing (selling) out of the money (“OTM”) call and
put options sold at different strike prices above
and below the predicted trading range. In
essence, via our statistical technical and
fundamental analyses, we endeavor to determine where
the market will not go, as this is often easier than
determining where the market will go, for the period
of our trade.
Essentially, we attempt to establish high
probability “win” positions. Inherent in this
strategy is the knowledge that there will be
instances where a position will result in a loss.
This is an absorbable inevitability. The view of our
trading strategy is similar to that of an insurance
company who write numerous policies knowing full
well that a small percentage of them may have
adverse results. To this end, we have in place
strict risk management guidelines, designed to make
appropriate adjustments based on movement of the
underlying futures contract. (See Risk Management on
page 8 of the disclosure document.)
Profits are derived when the price of the options
that have been written (sold) declines such that the
options can be purchased for amounts less than the
price at which those options were initially sold.
Moreover, profits also are realized when options
expire worthless, providing full part on the option
premium sold (after commissions and other fees). Our
primary trading philosophy is for profits to be made
when the value of options are reduced as a function
of time, rather than a function of market direction.
Ultimately, the profitability of our trading program
depends upon the subsequent price
movement of the underlying contract.
For example, if the index is above the strike price
of the put when the put expires, the position is
profitable. If the price of the underlying contract
is below the strike price of the put when the put
expires, the strategy may potentially produce a
loss.
Conversely, the strategy will be profitable if the
underlying contract is below the strike price of the
call when the call expires. If the price of the
underlying contract is above the strike price of the
call when the call expires, the strategy may
potentially produce an unlimited loss.
Trades are generally, but not always, initiated with
30 to 45 days to expiration. If the market remains
within the expected range and does not produce a
strong move in either direction then the options
sold will expire worthless and all premium income
collected will be profit.
The
Market Neutral strategy engages the use of
historical and current implied volatility and is
compared to the historical and current volatility;
the current price
of the underlying commodity, the volatility (VIX),
and the amount of time left until
expiration, all are factored in determining the
probability for the SCA investment strategy to be
profitable.
Historically, an estimated ninety percent (90%) of
the purchasers’ of options are net losers on their
purchased investment in options. Many of the
purchasers of options are making this investment
merely as an insurance investment; allowing them to
hedge their underlying commodity from a substantial
decrease in value. This is done as insurance to
protect against a substantial increase or decrease
of their underlying investment. Other purchasers of
options of commodities are speculators. These
speculators are playing calculated odds, assuming
that an event may occur, causing a substantial shift
in the value of an underlying commodity. Our
strategy takes the other side of this trade in
selling options to receive premium income.
The implementation of this trading program depends
on both technical and fundamental considerations.
Technical analysis involves the study of charted
prices, volumes, momentum, strengths, and moving
averages to determine the future course of prices.
Technical indicators also include the prices of
various options, both in absolute terms in relation
to their historic price level, and in relative terms
comparing the prices of puts to the prices of
similar calls. Fundamental considerations include
the condition of the market, the trend and
volatility of the markets, supply and demand, as
well as national and international political and
economic events, monetary and exchange control
programs and policies, changes in interest rates,
and prevailing psychological characteristics of the
marketplace.
The
Advisor has
developed a proprietary strategy for
finding, measuring, monitoring, investing, and
recognizing the commendable returns for option
selling. Real time pricing information is used and
is compared to the additional numerous amounts of
financial data available. Proprietary technical
tools are used to determine long-term support and
resistance price levels on the S&P 500. We sell call
and put options on the S&P 500 index using these
technically determined inflection points as the
strike price for the options. Most of these options
expire worthless at expiration because they are
significantly out of the money. In our opinion,
selling options at a predetermined price level
enables a client to enter or exit a trade at a
technically advantageous level that may result in a
higher number of successful “win” trades.
This SCA Market Neutral strategy creates a
potentially profitable scenario, although not
guaranteed, in all types of markets. There is
continuous monitoring of positions in relationship
to the price movement of the market, volatility and
economic and political developments, both here in
the United States and abroad. Flexibility allows us
to
change the trading range whenever it becomes
advantageous or necessary.
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The Equity Hedge Program
The Equity Hedge Program is a
fundamental portfolio hedging program which uses
technical and fundamental signals for entry and exit
while trading options on stock indices. Debt,
currencies and energy futures may also be used to
hedge against stocks when fundamentals warrant.
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Management Information
James A Schwab, CEO and Chief Investment Strategist,
is the sole Principal of Schwab Capital Advisors,
LLC. Mr. Schwab is registered with the CFTC as the
sole principal of SCA, and is responsible for all
money management, trade execution, and risk
management of all transactions executed on behalf of
SCA.
Mr. Schwab graduated in 1984 from the University of
Texas in Austin with a Bachelor of Science degree in
Engineering. Upon graduation he became a principal
of J&L Custom Homes and later president of
Cornerstone Custom Homes. In August 1991, Mr.
Schwab became president of American Bakery Supply,
Inc., a company he helped start, where he was first
introduced to futures and commodities as a
commercial and dealt with commodity hedging. The
company was later sold to an international firm,
where Mr. Schwab remained on and from January 2000
to September 2008 served as General Manager,
Regional Sales Director, where he was responsible
for the P&L of a $40 million unit while managing 75
employees, as well as Business Development Manager
and currently as Key Account Manager.
Mr. Schwab has been actively trading stocks and
options for his own account for over 20 years,
testing and honing his methods and skills. His hands
on business background and commodity experience
earned him a greater understanding of investment
fundamentals as well as applying technical analysis,
and quantitative approach to risk management. See
page 11 of this document for the client performance
of Mr. Schwab’s managed accounts.
His passion for option investing in futures led him
in December 2006 to become a registered series 3 and
30 futures broker serving as Branch Manager for ML
Bear Inc. There he was able to trade alongside
Philip Siegel and gain valuable trading experience
from option maneuvers employed on the T-Bond and
Euro Currency futures and it was there that the
option management strategy using the e-mini S&P 500
was developed.
In September 2007, Mr. Schwab launched Schwab
Capital Advisors, LLC to provide clients access to
his managed futures trading program as a Commodity
Trading Advisor (CTA). As such, Mr. Schwab became
officially registered with the NFA as a principal of
SCA on September 6, 2007 and on September 24, 2007
was registered as an associated person. In doing so,
on January 1, 2008, Mr. Schwab withdrew registration
as an AP and Branch Manager of ML Bear to focus his
futures business solely as a Commodity Trading
Advisor.
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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