Approximately 90% of the options sold in the Censura Technical Entry/Option Writing Trading Program expire worthless. In that sense Censura and its principal Jon Hansen operate a typical option writing strategy. However, Hansen targets certain inflection points in the S&P 500 to write those options. Those inflection or pivot points are areas where Hansen believes the market will reverse. In those incidences, Censura, which is part of Newport Private Capital, will be assigned those options and take its chances with the position. Once assigned, those positions will be hedged through additional option writing.
It doesn’t always work out that way but with the position further hedged, he won’t get beat up too much and he avoids the added cost of rolling positions or accepting a stop loss. “I never enter a trade where I am not willing and okay with taking the contract at that price,” Hansen says.
Though the vast majority of the time his program acts like a normal options writer, recently his strategy was tested. In April he was assigned 1470 and 1480 S&P calls. The market didn’t reverse as he expected and he was faced with a dilemma. In these cases Hansen usually sells deep in-the-money covered puts.
“When we got assigned the 1470s and 1480s, we waited for a retracement, which we got, and sold the 1490 and 1500 puts using my short contracts [to create] a covered put. If the market comes careening down, no problem because the contract would be put to us at these new levels, but the premium that we made is going to generate the profit for the account rather than the futures trade, which we will be losing money on.”
The program managed to avoid a huge drawdown. “Here we are trading 40 points above our strike and yet we gave back a couple percent in April and May and we may recoup those losses by the June expiration. The futures trade is a loser but the option trades are all winners and the idea going into the June expiration is that the option premium winners will offset the futures losses and historically that is what happened when we have been in this situation.”
Hansen credits the input of mentors and his entrepreneurial spirit for the development of his strategy. After graduating from the University of Utah in 1991, where he played basketball, Hansen took a job with financial planning firm Federal Financial Group. After three years he had the opportunity to move back to his native California and joined brokerage AFP Group as branch manager.
There he became familiar with technical based trading programs and began designing his own trading strategies. In 1997 he became an independent broker and sought advice from veteran S&P 500 trader and author Joe DiNapoli. “Over the course of three to four years I began pulling the best tools from these pretty successful traders that I was mentored by [and] started trading options on the OEX,” Hansen says.
“Trading options can be pretty volatile because you have to be right on every trade, that is where the whole concept of the current program came in. If you know where you want to get in, both on the long side and the short side, you can either wait for the market to get there or you can sell options against those predetermined positions and let the markets take you in. That is what I started doing in 1998.”
Hansen traded his own money and worked out the kinks of the program from 1996 to 2001. In 2001 he started an exempt fund trading his strategy and has produced a compound annual return of 26.73% with a worst drawdown of 13.64%. He became registered as a CTA in 2004.
Hansen says he is in a better position to survive the inevitable volatility spikes that tend to harm option writers because of the implicit value element of his program.
“The timing of when we enter the trade is key. I did not have a put on in February when the market dropped because my technical tools were all leaning towards a correction and I like to sell my puts into momentum on the downside,” Hansen says.
When he does enter, he has avoided the worst of the slide and volatility has increased making the puts more valuable. “That put premium is going to be really rich because of the volatility, which will allow you to sell deeper into-the-money and give you that much more protection.”
Hansen has the best of both worlds. “To me, from a basketball background, it is like you score points just if you hit the backboard. You pick your range and [say] ‘worst case scenario I am going to own this thing or be short this thing exactly where I want to be’ and in the mean time I am going to get some premium on the way and make some money.”
