Most of what I do in finance is self-taught and can be done safely in the confines at home instead of having to go to a university or some institution.
However, once in a blue moon, I like to try something different to get an idea of what may be out there.
IBKR was sponsoring this workshop by this active asset manager, which the name I will leave out. They were doing some tour presumably to promote their own actively managed funds, but the event was in the name of generating income through options and how they used IB’s trading workstation desktop software.
I was less interested in the fund and more on how they used TWS and also who would attend this sort of thing. Who knows, I might learn something. My hopes weren’t high.
Putting a long story short, this asset manager also takes client accounts and establishes long delta and short theta on index products, specifically on SPY and QQQ. They made it seem like voodoo magic. It appears their favourite trade is to buy bull put spreads and short call spreads deeply out of the money to harvest theta, but to actively manage the positions using very short term options (2 day, 4 day, in addition to the usual monthly expirations).
They showed a specific client’s managed account, which had approximately USD$2 million in liquidation value. The account also had $3.4 million in equities (mainly technology stocks), and it was also $1.4 million in margin. Apparently the client gave them a portfolio with a bunch of technology stocks and wanted to generate more income using options. The presenter claimed that because the maintenance margin on the account was well less than 10% of the net liquidation value, that the leverage employed was fine. In addition to all of the technology stocks, the asset manager had positions in what were a huge array of about 30 to 40 spread option positions, mostly on the SPX and of different temporal distribution. Some of these positions were hundreds of contracts, but many of the market prices of the options were less than 50 cents.
Their commission costs must be a fortune.
I also thought when it comes to tax time it must be a total nightmare to manage.
They explained how they were non-directional traders and were managing downside risk, notwithstanding the fact that when they viewed the SPX position on the TWS risk manager, they had a delta of about +2500 (that’s about $1M in notional risk, thus having some downside exposure), and all for a theta of about $1k (the time decay per day).
They made it seem like they were generating money from thin air.
Indeed, if you give me $2 million of client equity and sell deeply out of the money option spreads I can make you a thousand dollars a day – until the SPX decides to melt down one day when Vladimir decides to launch the missiles or something.
The presenter made it much more complex than it needed to be. The reason is that without the complexity, people would probably clue in there is no free ride in the derivatives market.
My biggest revelation was that about 200 people were in the room. I’m not sure whether this is a good or bad reflection on what is coming for the markets. All I know is that this style of trading is most definitely not for me and appeared to be gambling more than anything else, except in a veneer of using some needlessly sophisticated trades.
Did you get a sense of who those other people were? 200 is a lot.
I was surprised at the turnout. Perhaps my estimate was a little high but they had two columns of tables, 6 seats per table and it was about 15 to 20 deep, and most of the chairs were filled (at least initially, I would say about 1/4 left by the first break). The presentation itself was somewhat incoherent.
Demographically speaking it was about 80% male, and skewed towards the older middle-aged. Not many 20-somethings which was interesting in itself.
Thanks; very interesting/surprising.