Diamond Capital Management : Enhanced S&P Program

Summary

The Enhanced S&P Program (ESP) consists of primarily two basic trading components. These include a trend-following system enhanced with a premium capture system.Trend-Following System This system utilizes a computerized technical trend-following strategy with various levels of money management techniques. The principal objective is to profit from sustained futures price trends. Trend following is a method of trading which seeks to establish and maintain market positions based on major price movements. The system first determines whether the S&P market is in a bull or bear trend, then trades only with the trend until it gets stopped out. A stop would occur when the S&P moves out of the current trend but has not yet entered into the opposite trend. Within the Trend Following System, proprietary short-term counter-trend signals may be used to get out of the current position or even trade against the trend on a short-term basis. Premium Capture System Within this program, DCM will also write covered and/or uncovered options to capture premiums to increase the potential profits. (Option positions may also increase the risk of market exposure from time to time.) Each month puts and calls will be written – the goal being to capture the premiums either by letting the written options expire or by purchasing them back at lower price.The Volatility Index (also known as the VIX) will be used to determine the number of options to sell and what strike prices to be utilized. Strict risk controls will be in place to limit the downside risks and achieve a desirable risk/reward ratio.

Investment Strategy

Use of Trend-Following Analysis The trend following portion of the program may utilize sort-term, medium-term or long-term positions. The program may trade both the long and short sides of the market. In its evaluation of the markets, DCM employs a trend-following strategy. One method of successful speculative commodity trading depends upon establishing a position and then maintaining the position while the market moves in a favorable direction. The trader then seeks to exit the particular market and may establish reverse positions when the initial trend either does not materialize or reverses. Trading will not typically be successful if the particular market is moving in an erratic and non-trending manner. Because of the nature of the commodities markets, there will be frequent false-trends. A pure trend-following trading system, method, strategy or model will never direct market entry or exit at the most favorable prices. Rather, this type of trading method seeks to close out losing positions and to hold portions of profitable positions for as long as the trader determines that the particular market trend continues to exist and liquidates when the trend reverses. As a result, the number of losing transactions can be expected to exceed the number of profitable transactions. However, if the approach is successful, these losses should be relatively smaller and should be more than offset by a few larger gains.Use of Stock Index Options The option trading for this program is based primarily on writing out-of-the-money call and put options with the expectation that the options will either be bought back at a lower price or expire. In order to efficiently control risk, based on a proprietary risk control system developed by Mr. Hu, the trader will roll out of positions either vertically (to a further month) or diagonally (further out-of-the-money), as determined by current market conditions. From time to time, options may also be rolled closer to the underlying futures price if the perceived risk/reward is favorable. Technical analysis, chart reading and pattern recognition are used to determine which options to write for each monthly cycle. Occasionally, options may be purchased to either hedge positions or speculate on substantial movement in the underlying stock index.

Risk Management

Risk measurement is trade-based and takes into account volatility, current market conditions, and as well as other proprietary risk parameters. This implies a (internal) risk-evaluation by the applied systems, which may lead to adjustments of positions. The initial risk evaluation determines the position size at the time of entry. All positions have pre-defined profit goals and risk exposure. Stop loss measures are utilized as well as the use of derivative hedging techniques to quantify market exposure. Market conditions are monitored for liquidity, range of movement and implied volatility measured against historical volatility. In doing so, the Advisor employs money management skills acquired over years of experience.