From the October 01, 2012 issue of Futures Magazine • Subscribe!

Hot New CTAs: Not your father’s option traders

Robert Charles: A legacy of excellence

Robert Teel took a long time to become an emerging CTA. He started out trading the Value Line Stock Index on the floor of the Kansas City Board of Trade (KCBT), had a successful legal career, helped launch a family office and more recently turned his years of proprietary trading into a promising new CTA.

Charles Feurzeig hired Teel away from the law firm he was working at in San Diego in 1991 to help run his real-estate business. The two became fast friends and Feurzeig encouraged Teel’s passion for trading first by having him run his private equity investments and eventually a family office.

Teel earned a law degree and MBA from the University of Kansas. He traded at the KCBT before moving to San Diego to launch his law career. 

Teel’s proprietary trading record goes back to 1996 and it is a testament to trial and error. “As a prop trader, I made every mistake in the book,” he says. 

Teel’s trading evolved toward options, but what started out as a pure premium collection strategy trading only S&P 500 options turned into a volatility arbitrage approach that trades a diversified group of markets in several sectors. He trades grains, metals, energies, bonds and the S&Ps only on rare occasions. 

“I have grey hairs to match each volatile trading period,” Teel says, adding, “If I was just an S&P trader, I would not be sleeping very well at night, and I sleep well.”

Teel says that you could take a snapshot of his program at a moment in time and it will look like a pure premium collector, while at another moment in time its long option position value will exceed its short option exposure. 

“It is really a function of market conditions,” he says. 

Teel describes it as an arbitrage between statistical and implied volatility. “What is our secret sauce?” Teel asks rhetorically. “We try to be delta neutral, gamma neutral and theta positive, which is a bit of a trick. You can build that only on an ongoing basis; it is very hard to put a trade on that looks like that.”

He starts with a short options position and then uses long options or futures to capture equity if the conditions are right.

“I put myself into a position that hopefully I have a floor on my profit, and if I need that delta adjustment, I am going to pick up profits on the tails if it moves that far,” Teel says. “[Are my long options and futures] a hedge or profit? I don’t know. It is whatever I need to do to keep it delta neutral. A lot of the time that will result in a significant profit on the long position, the futures or the long options, but that is not [what] I targeted.”

In 2010 after his mentor and namesake for his program passed away, Teel decided to take the strategies that evolved over the years and open his own CTA. The program has not had a losing month since launching in September 2011 and has returned 39.32% in 12 months. While a drawdown will come, Teel targets a return-to-drawdown ratio of 5 to 1. 

“Typically I am not buying volatility in the markets that are low, though I will buy it to hedge out the risk and to maintain delta neutral,” he says. “In fact, we are in a volatility contraction period and what works there are the Christmas trees, vertical spreads and one by twos.” 

Since launching the CTA, Teel has sharpened his focus on the risk side but still has ambitious goals. “Our objective is 30% with a 6% drawdown,” he says, while acknowledging, “Our numbers right now are unsustainable.”

His proprietary record is even more impressive, so he feels there is no reason he can’t maintain that profit ratio, which he attributes to its rigorous nature. “I don’t think of it so much as unique as rigorous,” Teel adds. 

Charley Feurzeig would be proud.

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