While Vitiello was still floor trading, he befriended Sacks, who was making markets in gold options. Sacks, who studied finance at the University of Massachusetts — Amherst, has been a Comex member since 1997.
Unlike futures market making, options market making still remains viable. But Sacks says the writing is on the wall for options locals as well.
So the two designed a strategy based on systems Sacks had been trading that they believed would capture major upside moves in gold and mute the downside. Ironically, they say the strategy that trades gold options is not correlated to gold and targets passive gold investors who need to reduce volatility while maintaining opportunity. They aim to make strong profits and/or offset losses in large tail events in either direction. “I would characterize it as a tail risk fund. It really is an absolute return strategy,” Sacks says.
“Basically we are looking to go to someone who has $10 million in the GLD and say you would be better with $5 million in GLD and $5 million in Aurum,” Vitiello adds. He says the strategy is capable of being flat or profitable in major downturns, and capturing large upside moves. “If gold doubles, we are not going to double, we will earn several multiples. And if gold rallies 5%, on the occasions that we don’t catch it, [our clients are] still 50% passive long. In exchange for giving up some potential profit on a modest rally, they are paying us to improve both of their tail scenarios,” he says.
Sacks says they use ratio call spreads primarily over different lengths of time. “We craft it so that it is like a modified ratio butterfly; it is always in some way net long calls but we might be selling one option with one year to go and buying two options with one month to go. We are taking in the premium but we are spending it to buy extra nets. So, technically, we can’t call it a butterfly or call spread, but in essence it is a ratio calendar call spread that is always long nets and always flat premium,” he explains.
The approach has worked thus far. Aurum launched in April 2011 and earned 20.04% for the year trading managed accounts. They are up 8.61% through March this year after dropping 8.45% in 2012. Now they are preparing to launch a pool.
“It is a way for people who have been in the GLD for many years to sort of synthetically boost profits, take a little money off of the table and keep something in there to participate should something happen,” Sacks says.