1. SPYGLASS TRADING, L.P. RISK-ADJUSTED RETURNS & MANAGING VOLATILITY

2. TRADING MODEL 90-95% of trades are in options Most opening positions are selling option wings expiring in the spot month –Routine and systematic in equity names we know –Also sell some index options –Expectation is for option to expire worthless Some short term trades using long index options or long put or call equity spreads May execute long or short positions in stock

3. BENEFITS Large cash credit balances Creates lower cost of capital for stock positions Increased return in a range bound or gradually trending market Do not have to be exactly right to profit Required to frequently re-evaluate portfolio

4. CONSEQUENCES Event risks, e.g. mergers or crises Substantial directional moved based on skewed market psychology Lost profit when directional bias is correct Potential loss in any given position can significantly exceed potential gain Highly intense, requires constant monitoring, and may generate higher trading costs

5. RISK ADJUSTED RETURN STRATEGIES Selling the wings Covered writes to exit long or short stock positions Converting to strangles Diversification

6. SELLING THE WINGS Assumes same risks as covered write position Requires less margin Eliminates need for market movement to make money Sells in spot month only –Lessens time window for negative events –Increases return based on premium decay rate

7. COVERED WRITES Used solely as an exit strategy for long or short stock positions Sell in-the-money puts against short stock or in-the-money calls against long stock Benefits: –Forces elimination of the position within weeks –Captures additional gain up front –Reduces some risk of a directional change

8. CONVERTING TO STRANGLES Opening position in a stock or index of a short put or call Later add a short of the opposite option Little to no additional margin required Risk needs to be low to be effective

9. DIVERSIFICATION Large number of different positions Have to sell both puts and calls Trade in a variety of unrelated market sectors Utilize index options Carry bonds, bond funds, reits, and listed funds to add stability; i.e., reduce overall portfolio risk

10. MANAGING VOLATILITY Roll –Same month if time and premium at desired strike –Calendar if late in month Buy long spread –Spreads in out months –Buy same strike, sell next strike –Ratio Buy or short sell stock Sell in-the-money offset option Taking advantage of volatility – an earnings play

11. Final Thoughts Technical versus fundamental Time and labor intensive approach Has the potential to under perform in strongly trending markets Greatest risk is being out of the market