Performance

Strategy Description

It is well documented that the strategy of “selling premium” (short options) is profitable in “quiet” or low volatility markets. However, when volatility increases sharply, many months (or even years!) of profit can be lost if risk is not properly managed. The Balanced Volatility Program (“BVP”) was developed as an alternative to “naked” option selling programs. A primary objective of the program is to offset volatility risks which are inherent in short option or “premium selling” programs, while still offering the benefits of an absolute return strategy.

The BVP trading strategy blends various short and long Put options to create an overall position that is buffered from increases in volatility. Furthermore, positions are strategically placed across different calendar months using a “diagonal spread method” providing an overall net long volatility position. Each new position is “delta neutral” which provides additional insulation from market volatility. These core elements result in a balanced strategy. In May 2010, CBCM developed a proprietary option pricing model. The Advisor believes this “Straight Line Time” option pricing model to be more useful than Black-Scholes in determining the true time decay value of options. It is the opinion of CBCM that the Straight Line Time (“SLT”) model identifies the optimal exit points at which open trade positions should be closed. Trade positions are placed (using proprietary strike level and ratio algorithms) to achieve a strategy that can be profitable in flat or volatile market conditions. Profit is made through the expansion of the spread’s “Theta Differential.” This creates a position that can make profit from time decay and underlying market moves. The primary risk controls for the BVP are stop limits (which are derived as a function of account value) and real-time monitoring of positions. Furthermore, the BVP only participates in high liquidity markets (currently the S&P 500 futures Put option contracts).

It is the opinion of CBCM that returns alone should never be used to evaluate the merits of an investment. This is particularly true when considering a managed futures program because of the high degree of leverage that is possible with futures. In fact, returns alone reveal nothing about the risks to which an account may have been exposed in pursuit of those returns. By their nature, futures are risky instruments. With respect to trading options on futures contracts, CBCM has imposed certain restrictions and procedures upon the Program, in light of their inherent risk.