Cervino Capital Management LLC : Diversified Options Strategy 2X

Summary

Cervino Capital Management’s DIVERSIFIED OPTIONS STRATEGY 2X is an absolute return program which involves the same trading strategies as the Diversified Options Strategy 1X program but 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. The objective is to generate consistent monthly returns averaging between 100bps and 500bps for an annualized target of 20% to 30% per year. The maximum peak-to-trough drawdown since inception is (10.24%) and began in September 2008. The managed futures program trades options on a diversified portfolio of financial futures contracts including equity indices, fixed income, currencies, and precious metals. Opportunity and risk exposure is further diversified through use of different types of complex option positions such as debit spreads, credit spreads, condors, ratio spreads, strangles and calendar spreads as well as naked puts and calls. There are varying risks associated with these strategies, including the risk of unlimited loss associated with writing naked calls or puts.

Investment Strategy

Cervino Capital Management specializes in trading separate managed accounts for sophisticated investors. Our primary objective is to produce risk-adjusted skill-based returns through a variety of alternative and traditional strategies. Our investment philosophy recognizes that investment performance is a function of risk taken, but also that the complexity of human behavior can never be fully modeled. And while mathematical techniques reveal important dynamics within the markets, circular relationships between cause and effect relegate quant models to just an abstraction of reality... Expecting models to be exactly right is unreasonable. Rather, a discretionary common sense approach is needed—one which balances the quantitative with the qualitative in order to manage the cycles of volatility.

Risk Management

Risk control is instituted through a variety of means with the aim of minimizing drawdowns in most market conditions. The first is portfolio construction and diversification; second is controlling leverage through position sizing adjusted according to account size, volatility and risk-reward analysis; and third is stops based on money management rules. Risk control might not limit drawdowns.