At GCM, we sell options on the futures contract, S&P 500 Index. We analyze a great amount of statistical and historical data while determining not what a market will do; instead we try and determine what the market will not do in a specified period of time.

Buyers of options, who are speculators, compete against the time decay of a wasting asset (hoping for an explosive move of quick market direction in their favor) and frequently experience the loss of their premiums within the time frame of the option.
Hedgers, such as mutual funds and hedge funds who seek upside market potential, use options as an insurance vehicle and are willing to forgo the premium of the options for the primary purpose of insuring the downside risk on their portfolio.
We have developed a methodology around this concept by taking the other side of the trade, namely being the seller and collector of the premiums that most speculators lose and the hedgers are willing to forgo.

We determine the number of options we sell based on available premiums and the total equity position of an account. We calculate the margin of error that we might encounter, and choose those strike prices we believe will statistically/historically expire worthless and are worth collecting premiums on. Again, our goal is to decrease the volatility in your account and get a desired return with much “breathing room”.

Market volatility and extreme market volatility increase premiums of Put and Call Options. During extreme market volatility, we have found that option premiums are above their norm and are best suitable to sell. Please bear in mind, that past performance is not indicative of future results, the risk of loss involved in selling options is unlimited and is not suitable for all investors.

We specifically look at two components during the volatile period:

1. Historical Volatility - Where we use historical (daily, weekly, monthly, quarterly, and yearly) price data to empirically measure the volatility of a market or instrument in the past.

2. Implied Volatility - is the volatility that, given a particular pricing model, yields a theoretical value for the option equal to the current market price. Namely, we are looking for the options to be priced right.

Any deviation that we notice in the pricing model provides an opportunity or lack thereof for selling the options and collecting the premiums. Also, we have calculated precise points of exit in the event we have to buy back and offset the option position at a higher premium.

Most importantly, a large portion of our methodology is exercising patience and waiting for those times where risk justifies the reward. It’s not simple as people may think. If we wait too long, the entire opportunity to sell options in a given month can be lost.

We feel while implementing these strategies, we will be able to potentially provide a high risk adjusted rate of return in our clients account while reducing the swings in equity many managers experience in their trading programs.
We welcome all your questions and inquiries. Please be advised that the risk of loss involved in writing (selling) options is unlimited, that it is not suitable for all investors, and that the risk of loss is substantial in futures and options trading no matter who is managing your money. Past performance is not indicative of future results.