From the October 01, 2010 issue of Futures Magazine • Subscribe!

Cervino: Managing a mountain of risk


Accomazzo had been trading proprietary money for years so they basically adopted the option strategy he was trading with some alterations. “We are options traders, not options writers,” Accomazzo says. “We kind of play the reinsurance model which is a variation of your typical option writing.”

“The idea has always been to not be just pure options sellers but also option buyers. The program goes to four layers: We look at market analysis, technical analysis, support and resistance and sentiment analysis,” Accomazzo says. “Behavioral analysis is so much more important in understanding markets than anything else,” -- or as Frankfurter would put it, putting both the quantitative and qualitative elements to work.

Their 2008 returns illustrate this as Cervino stayed positive, 3.65%, in one of the most difficult atmospheres for option writers. Their worst drawdown is 5.93% since launching in 2006.

Cervino attributes that risk control to a focus on capital preservation and their discretionary approach. “If you are relying on rational expectation theory, something that happened in 2008 should probably never happen or should happen every 25,000 years. The reality is in financial markets that kind of event happens frequently,” Accomazzo says. “If that sensitivity and discretionary approach is built into your trading, you will be much quicker to react to changing conditions.”

While the options program performed well in difficult market conditions, there is a strange vibe in recent years and Cervino was looking to tap into it. “It became very apparent after 2008 that gold might be part of the solution,” Accomazzo says. But gold is so volatile that even many bulls have failed to take advantage of its 10-year move. “Gold has a tendency of producing these mini crashes that take people out of positions even though the long-term trend is positive,” he adds.

They researched many ideas and settled on a covered call strategy with a discretionary put option attached. They figured a covered call strategy would produce long-term returns close to the beta of gold with much lower volatility. The program is long futures, short calls and long on out-of-the money put.

“We take a lot of stress out of [being long gold],” Accomazzo says. “Sure, we will underperform when gold goes parabolic but the reality is over the [long-term we] will be capturing that long beta [with] a much lower standard deviation.”

While their histories are from opposite sides of a mountain, Mack and Davide are on the same page as far as risk.

(Cervino closed its program shortly following the PFG bankruptcy.)  

Photo of Frankfurter by David Lubarsky; Photo of Accomazzo by Jonah Light

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