Ansbacher Investment management (AIM) was already one of the oldest and most successful option writing commodity trading advisors in 2002, so there was some risk involved when founding principal Max Ansbacher brought on a partner to revamp the original Elizaville Partners trading program. Maruf H. Khan Noorpuri joined Ansbacher as principal in November 2002 after meeting Max socially several years earlier.
Khan Noorpuri at that time had 20 years of global financial experience working in both Europe and Asia after graduating from the London school of Economics. He was head of the international bond desk of Nomura Securities, working in London and New York prior to creating the New York structured bond desk of Hypo Vereinsbank, the second largest bank in Germany. Like Ansbacher, Khan Noorpuri was involved in writing options long before it became an accepted money management strategy.
In January 2003 he initiated changes to the core option writing strategy of AIM that has dramatically improved the program’s risk profile. “It is a question of making change gradually. Prior to January ‘03 the concept was option writing only — that is Max’s legacy,” Khan Noorpuri says.
The first task was changing the strategy to be market neutral. Khan Noorpuri altered the strategy to make it more sensitive to delta and gamma risk. Since January 2003 AIM’s program has produced an annualized standard deviation of 4.5, the lowest STD of any option writer in the Barclay database for that period. In that time, the program has produced a compound annual return of 14.30%. The seven-year track record of the program prior to the changes initiated by Khan Noorpuri produced a compound annual return of 16.43% with an annualized STD of 27.80.
In April of this year, Khan Noorpuri made another change to the program, eliminating the use of calls altogether. “We were writing put and calls until about [April] and I replaced the calls with short futures positions. So we are still market neutral, writing options on only one side as opposed to the strangle structure, which is what we were doing between January ‘03 and March 2007.”
Khan Noorpuri says the change has already produced positive results. The program had a positive April, a difficult period for option writers as the S&P 500 rallied 6%. “The advantages to this are several. By eliminating calls I have taken away the Vega and Gamma risk on one side. I have created greater flexibility.”
Because options on the S&P 500 and Treasuries do not have a liquid 24-hour market, option traders are exposed to greater risk during off hours. By only selling puts and covering that with futures Khan Noorpuri reduces that exposure. “I manage my risk on a 24-hour basis, which you were not able to do in the previous structure,” he explains. “This new structure of capturing the decline of time value in the options is better served and the results are corroborating that.”
He describes that he is short puts and short futures and close to delta neutral. “I have developed a methodology that calibrates gamma and vega adjustments and I articulate that through my futures/put relationship,” he says. “I am still selling out of the money puts, short dated, but I am managing the inherent risk by being short futures against it. It is generating more consistent results far better than what I was doing in the previous four years, which was already pretty good.”
He says there is a natural skew to the puts because the vast majority of the investing public has long equity exposure, so there is a higher demand for puts to hedge those portfolios.
“Hence my focus on the put skew rather than being short calls and buying futures. By creating a structure where I am basically market-neutral and manage my risk on a day-to-day basis I am offering a product to customers, which is very unique and completely uncorrelated.”
Khan Noorpuri says his alterations have not only produced better risk- adjusted returns but keeps AIM uncorrelated in the growing field of option writing.
“Anyone can sell an option but the profile of your risk will vary dramatically depending on which strike you sell, which month you sell, how many you sell [and] what you do after you sell it. You could be a put writer, I could be a put writer, but because we do it in slightly different ways our risk profile and our results will be dramatically different,” he says.
Khan Noorpuri says market neutrality is an objective and can’t be perfectively achieved as the market always is moving. “I am doing trades all day long to manage that,” he says, adding, “the cornerstone of the system is having the delta and gamma exposure at an optimal level.”
The secret to his success is the proprietary method for reaching that optimal level. “It is very intensive research, it is very precise and it requires discipline,” Khan Noorpuri says.
