Hyman: Exploiting statistical edges
Like many options-based strategies, OptHedge Advisors’ Diversified Futures and Options Program relies on premium collection for much of its profits, but as we are seeing more and more, it uses the vast array of option tools to optimize every trade regardless of where the profits come from.
Like several newer and innovative option programs, there is a value element that constantly looks to buy implied volatility low and sell implied volatility high.
Coby Hyman, founder and principal of OptHedge, began trading proprietary money in this discretionary option program in October 2008. It has produced an impressive compound annual return (CAR) of 30.82% with a worst drawdown of 4.08%. When you only look at returns once he added customers in September 2010, it remains impressive with a CAR of 20.81% and a worst drawdown of 2.31%.
Hyman had traded on his own for more than a decade before launching the program. He worked for two large hedge funds after earning a law degree from the University of Texas, and while the experience working with professional portfolio managers was valuable, he was never involved in trading operations.
“I was thrilled that I was doing so well in my personal account and wanted a career where I had more control over my schedule,” Hyman says.
His program looks for various option strategies with a statistical edge. All trades are entered as spreads, but they can be calendar spreads, ratio spreads or simple strangles.
“What I am looking for is a situation where options at certain strikes or in certain months that I am buying are cheaper from an implied volatility perspective than the ones that I am selling,” he says.
The program trades roughly 15 markets including grains, energies, metals, softs, currencies, bonds and stock indexes, but generally will have positions on in only five markets at one time.
“I constantly am looking at the volatility landscape to see if implied volatility is higher currently than it has been historically,” Hyman says. “But what I am also looking for is big skews. If there is an enormous skew where the deep out-of-the-money options are much more expensive than the at-the-money options, I consider a ratio spread because you are selling the expensive options in that landscape and buying the cheaper at-the-money options. You can manage the risk on that type of trade pretty tightly.”
But that is only one statistical edge he looks for. “I also am looking between months. A lot of times the near-month options will be trading at a higher implied volatility than the options further out.”
This summer he was able to exploit anomalies in premiums in the Sept./Dec. corn option spread.
“I [sold] an option in the near month that essentially paid for the option that I [bought] in the far month,” Hyman says. “The trade can benefit from time decay as well as the shrinking volatility differential over time as it gets closer to expiration.”
“Usually I am doing those calendar spreads fairly deep out-of-the-money. The goal is, as time goes by, to have the option that you are selling decay at a quicker rate than the option that you are buying,” he says. “If the option that you are selling expires worthless, the option that you are buying still likely will have value.”
Hyman also will enter strangles in more of a pure premium collection play. He says that his various strategies add an extra element of diversification to his program.
“I simultaneously have a ratio spread in one market, a calendar spread in another market and strangles in a couple of other markets, so my positions are not correlated with each other.”
That extra level of non-correlation has helped to produce an impressive risk return profile. The program has had only three down months, the worst, -4.08%, in May 2010 when the Flash Crash occurred. Looks like Hyman has found his statistical edge.
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