Crescent Bay Capital
Program Descriptions
Premium Stock Index Program
The objective of this strategy is to achieve substantial capital appreciation through the speculative trading of option on futures contracts. This objective can entail a comparatively high level of risk. CBCM currently engages in this strategy of selling or “writing” put and call options on stock index futures. However, in the future, CBCM may trade a broader portfolio of options and futures contracts, including agricultural, metals, currencies, and financial instruments. Each of CBCM’s clients will receive advance notice, before having their account traded in any other type of commodity interest other than the stock index futures and options. CBCM may trade commodity future and option contracts on any United States exchange.
CBCM’s option strategy collects premiums by writing (selling) out-of-the-money options. The seller (writer) of the option risks losing the difference between the premium received for the option and the price of the underlying futures contract. Trades are usually made 30-45 days from expiration. The goal is to exit the positions before expiration at an “opportunity cost” profit stop. This profit stop is based on the logic that underlying futures moves can accelerate the profit potential of the position. For example, if an option is sold 40 days out from the expiration date and a market move occurs which results in a 70% profit after only 5 days, the position would be covered and the profit realized. This allows for the sale of a new option (still 35 days out from expiration) and the opportunity for increased returns, rather than waiting 35 days to capture the remaining 30% of the initial premium.
What makes CBCM’s strategy unique is that historical prices are not used to establish positions, and a short-term trend indicator is used to help reduce the probability of selling options against a negative trend. The majority of methods used by advisors are based on the assumption that historical price data can predict future prices. While the use of historical price data has shown to be profitable, CBCM believes deeper draw-downs and lower accuracy are generally the result of this type of analysis. CBCM uses the future perceived value in its proprietary algorithms, derived from the current month option expiration, to determine the strike price at which options are sold. In addition, position sizing methods are employed to optimize risk-adjusted returns by balancing put/call exposure.
The profitability of a trading system consisting of selling (“writing”) uncovered options on an index depends on the price movement of the index. If CBCM writes calls on an index, and the calls are not bought in before their expiration, the strategy will be profitable if the index is below the strike price of the call when the call expires. If the index is above the strike price of the call when the call expires, the strategy may produce a potentially unlimited loss.
If CBCM writes a put on an index, and the puts are not brought in before their expiration, the strategy will be profitable if the index is above the strike price of the puts when the puts expire. If the index is below the strike price of the puts when the puts expire, the strategy may produce an almost unlimited loss.
In order to manage risk and mitigate losses, CBCM will attempt to buy back (cover) options before expiration if stop loss levels are exceeded or will take a position in the underlying futures contract when extreme volatility conditions arise. This underlying position hedges against additional position risk until volatility diminishes.
Objectives for Programs
CBCM’s trading programs seek to generate high risk –adjusted returns in both up and down markets through trading in selected commodity interests. The Advisor relies on proprietary systematic trading models that it’s principal has extensively developed and tested in-house. These models operate 75% systematically and 25% discretionary.
The trading methods applied by CBCM are both proprietary and confidential. As a result, the following discussion is of necessity general in nature and not intended to be exhaustive. CBCM intends to regularly evaluate its trading methodology and retains the discretion to revise any method or strategy, including the technical trading factors used, the commodity interests traded and/or the money management principles applied. Such revisions, unless deemed materials, will not be made known to clients.
CBCM’s primary goal is to generate consistent and positive returns while limiting draw-downs and volatility. Their secondary goal is to maintain a low degree of correlation with respect to other CTA programs, hedge funds, S&P 500 index, and investment benchmarks in general. The Advisor attempts to accomplish this secondary goal by employing trading methods that it believes are different from those of other investment managers thereby offering investors an approach that may not already be represented in their portfolios. Investors have long turned to CTAs for diversification but in the view of the Advisor, emulating other CTAs does not increase diversification within the sector.
The descriptions above are primarily from the manager’s disclosure document.
Required Documents ( in PDF Format )
Crescent Bay Disclosure Form
THE RISK OF LOSS IN TRADING FUTURES, OPTIONS AND FOREX CAN BE SUBSTANTIAL. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. PLEASE READ THE CTA'S RISK DISCLOSURE DOCUMENT CAREFULLY BEFORE INVESTING MONEY.
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