Financial Commodity Investments : Option Selling Strategy

Summary

-The goal of FCI is to achieve appreciation with the use of alternative investment strategies. FCI will attempt to obtain consistent quarterly returns that exceed those of the equity market and to protect capital against adverse market trends.

Investment Strategy

FCI currently engages in a program of selling or "writing" options (puts and calls) on futures contracts in the crude oil, coffee, soybeans and corn markets, FCI uses an approach to trading that relies heavily on selling or "writing" options on futures contracts. FCI may also, from time to time, purchase options and may employ the use of hedge strategies such as option spreads, strangles, straddles, or may purchase or sell futures to offset an open option position. FCI utilizes a market neutral trading strategy that does not attempt to forecast market direction. FCI utilizes options on futures to initiate market neutral positions by simultaneously writing (selling) OTM call and put options, followed by appropriate adjustments based on movement of the underlying futures contract. 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. Profits also are realized when options expire worthless, providing full profit on the option premium sold (after commission and other fees). FCI's 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. It is the intention of FCI to write options that are at least 10% to 20% out of the money from the price of the underlying futures contract. "Out-of- the- money" puts have strike prices below the current price of the underlying futures contract, and "out-of-the- money" calls have strike prices above the current price. FCI 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. Information used to influence the investing decisions includes: The historical pricing patterns of the underlying assets and/or indices; The historical and current implied volatility and is compared to the commodity's historical and current volatility; The commodity's price movement; Current press release and financial forecasted data of an commodity; The liquidity of an underlying asset and its related options.

Risk Management

FCI projects a trading range for a commodity contract over a specified period of time, usually one to six months. After considering other factors, FCI sells put and/or call options on the outer limits of that trading range. If the contract price stays within the projected range, time will erode the value of the option to the purchaser, the option will be worthless at expiration, and the premium that the client collected upfront, net of brokerage fees, will be profit. If the contract price starts to get close to a strike price and threatens to breach one of the projected limits, FCI needs to manage this risk. It should be emphasized that, unlike an option buyer who risks losing only his investment in the premium, the seller of an option has unlimited risk. FCI must carefully manage this risk. If it does not manage this risk, a client could have substantial losses. In addition, there may be market conditions that make it impossible to properly manage this risk. Thus, FCI’s options selling program is designed for sophisticated investors who can accept a high degree of risk. Due to the risks involved in selling options, significant emphasis is placed on risk management techniques to minimize the losses on any particular trade on the portfolio as a whole. Stop-losses orders are used and managed in a proprietary manner to balance the potential loss in any trade versus the opportunity for maximum profit. Stop-loss orders may not necessarily limit losses since they become market orders upon execution; as a result a stop-loss order may not be executed at the stop-loss price. Depending on the model used, risk may be managed through variable position size or risk levels for any market. Additionally, modern portfolio techniques are used to construct the overall portfolio for a given program. These techniques will account for the volatility and correlation for markets as well as behavior during specific market extremes. Portfolio adjustments will be made to account for systematic changes in the relationships across markets. Portfolios are managed to meet risk and volatility tolerances.