Raithel Investments Inc. has been successfully trading its Target Volatility option writing program for six years. The longevity is important because the recent environment for option writers has been so good. It is hard to judge a manager who has not faced difficult markets. Raithel managed the volatility spike following the September 2001 attacks in New York and Washington with a 6.9% drawdown: the program produced an 11.98% return in 2001.
John Raithel, president of Raithel Investments, has designed his systematic option writing program to withstand huge spikes in volatility. The program sells strangles with put and calls equally apart for the current S&P price. Positions are put on approximately five weeks before expiration. He sets fixed stop targets that do not move. Positions are either stopped out or expire worthless. He doesn’t roll positions further out when the options move against him. “I like to have each month stand by itself,” Raithel says. “By not rolling when it gets into trouble or rolling down to a lower strike price on the puts, or to a higher strike price on the calls if it zooms up, there is only going to be one hit a month.”
By not rolling, Raithel avoids getting hit twice, but also hopes to avoid cataclysmic losses. Raithel points out that nearly all of the major stock market declines were indicated.
“I am not aware of any cataclysmic decline in the stock market at any time that was not preceded by the stock market already [being] in a downtrend at least four to five weeks before [the] decline,” Raithel says. “In 1929 it didn’t happen. In 1987 it didn’t happen. In September 2001 it didn’t happen. In each one of those major declines the stock market was already going down.”
That is why Raithel prefers not to roll positions.“ You haven’t reduced your exposure and then when the cataclysmic event happens you are still out there.”
He says he tries to be market neutral but adds that he doesn’t think there is such a thing. “As soon as you put on a trade that is market neutral, you just have to wait for the next tick and it is no longer market neutral.” He will not adjust positions to keep them market neutral. “If my stops are hit I am out and wait for the next cycle.”
Raithel is a student of markets and he knows that the environment for option writers will not always be so benign. “The volatility of the stock market will at some point increase dramatically. The only question is when.” Raithel told his son, Bryan, who has recently joined the firm as vice president, to “enjoy this while you can because it doesn’t get any better than this.”
Raithel expects to see a washout in the fast growing option writing space when the inevitable spike in volatility occurs but says he has the risk management in place to handle that. “I am pretty confident that I will be able to withstand that based upon the 9/11 experience.”
