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Option Strategist – Swiss Market Index (SMI) Asset Management: A highly competitive landscape anchored in the Mean-Variance space. Monetizing Volatility Significant potential enhancement of performance Increased potential underlying asset’s returns via volatility monetization Reduced risks in the mean-variance space Transparent, flexible and actionable strategies: Systematic management: “Passive” investment strategy that requires no investment timing decision. Allocation decision: Overlays: solutions with minimal impact on a strategic asset allocation. Dedicated allocation: Certificates, Structured Products, etc… Options offer portfolio managers unrivaled tools to enhance their performance and to better manage their risk exposures Multiple passive option-based investment strategies have offered and offer more attractive return and risk profiles in a mean-variance context than traditional passive investment strategies on similar underlying assets. Covered call strategies consist in systematically selling one-month out of the money calls and rolling those positions at expiry. This systematic approach does not require any decisions in terms of market timing. Covered Call strategies offer attractive payoff profiles: Historically offered higher investment performance Display asymmetric payoff profiles Offer lower variance and drawdown risks Though passive and implemented in a mechanical manner, this strategy dominates the efficient frontier on a historical basis. Covered Call Strategies offer a simple, transparent and liquid alternative to tap the most recognized and documented source of alpha: Covered call strategies are an easy and efficient way to monetize volatility: an approach that offers mechanical investment protocols with clear statistical return characteristics, and attractive historical track-records. Historically, the strategy has produced significantly higher returns with lower realized volatility when compared to the underlying security, resulting in attractive Sharpe ratios. Covered Call strategies are structurally short volatility strategies that allows investors to exploit one of the very few sources of academically recognized and widely documented market inefficiency, that is the non-convergence between implied and realized historical volatilities. SMI SWISS MARKET SX5E Euro Stoxx 50 Pr SXXP STXE 600 € Pr UKX FTSE 100 CAC CAC 40 DAX DAX FTSEMIB FTSE MIB AEX AEX-Index OMX OMX STOCKHOLM 30 BEL20 BEL 20 SPX S&P 500 NDX NASDAQ 100 STOCK INDX SPTSX60 S&P/TSX 60 IBOV BRAZIL BOVESPA NKY NIKKEI 225 TPX TOPIX (TOKYO) HSI HANG SENG AS51 S&P/ASX 200 NIFTY NSE S&P CNX NIFTY TWSE TAIWAN TAIEX ABI BB ANHEUSER-BUSCH INBEV NV SAN SQ BANCO SANTANDER SA BBVA SQ BANCO BILBAO VIZCAYA ARGENTA CRH ID CRH PLC ENEL IM ENEL SPA ENI IM ENI SPA G IM ASSICURAZIONI GENERALI IBE SQ IBERDROLA SA INGA NA ING GROEP NV-CVA ISP IM INTESA SANPAOLO NOK1V FH NOKIA OYJ PHIA NA KONINKLIJKE PHILIPS ELECTRON REP SQ REPSOL YPF SA TIT IM TELECOM ITALIA SPA TEF SQ TELEFONICA SA UCG IM UNICREDIT SPA UNA NA UNILEVER NV-CVA ADS ADIDAS AG ALV ALLIANZ SE-REG BAS BASF SE BAYN BAYER AG-REG BMW BAYERISCHE MOTOREN WERKE AG BEI BEIERSDORF AG CBK COMMERZBANK AG DAI DAIMLER AG-REGISTERED SHARES DBK DEUTSCHE BANK AG-REGISTERED DB1 DEUTSCHE BOERSE AG LHA DEUTSCHE LUFTHANSA-REG DPW DEUTSCHE POST AG-REG DTE DEUTSCHE TELEKOM AG-REG EOAN E.ON AG FME FRESENIUS MEDICAL CARE AG & FRE3 FRESENIUS SE-PREF HEN3 HENKEL AG & CO KGAA VORZUG IFX INFINEON TECHNOLOGIES AG SDF K+S AG LIN LINDE AG MAN MAN SE MRK MERCK KGAA MEO METRO AG MUV2 MUENCHENER RUECKVER AG-REG RWE RWE AG SZG SALZGITTER AG SAP SAP AG SIE SIEMENS AG-REG TKA THYSSENKRUPP AG VOW VOLKSWAGEN AG AC ACCOR SA AI AIR LIQUIDE SA ALU ALCATEL-LUCENT ALO ALSTOM MT NA ARCELORMITTAL CS AXA SA BNP BNP PARIBAS EN BOUYGUES SA CAP CAP GEMINI CA CARREFOUR SA ACA CREDIT AGRICOLE SA BN DANONE DEX
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This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.
Q.M.S Advisorstel: 078 922 08 77
e-mail: [email protected]: www.qmsadv.com
Option StrategistCovered Call StrategySwiss Market Index (SMI)
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 1
� Asset Management: � A highly competitive landscape anchored in the Mean-Variance space.
� Monetizing Volatility� Significant potential enhancement of performance
• Increased potential underlying asset’s returns via volatility monetization• Reduced risks in the mean-variance space
� Transparent, flexible and actionable strategies:� Systematic management:
• “Passive” investment strategy that requires no investment timing decision.� Allocation decision:
• Overlays: solutions with minimal impact on a strategic asset allocation.• Dedicated allocation: Certificates, Structured Products, etc…
Enhancing Long-Term Portfolio Performance while Diminishing Risks in the Mean-Variance SpaceGOAL
Option StrategistCovered Call Strategy
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 2
Attractive historical statistical features
� Each strategy offers attractive statistical features whether considered on a standalone or total portfolio basis, and this despite the extreme market environment considered in our analysis.
Source: Bloomberg, QMS Advisors
Option Strategist Covered Call Strategy
SMI TOTAL RETURN
SWISS MARKET
INDEX
CSETF ON SMI Ex-Div
Covered Call
Strategy: ATM
CSETF ON SMI Ex-Div
and the Covered
Call Strategy:
ATM
Covered Call
Strategy: 2.5% OTM
CSETF ON SMI Ex-Div
and the Covered
Call Strategy:
2.5% OTM
Covered Call
Strategy: 5% OTM
CSETF ON SMI Ex-Div
and the Covered
Call Strategy: 5% OTM
Historical Returns -2.78% -5.29% -5.21% 3.76% -1.64% 7.39% 1.80% 7.02% 1.44%Historical Volatility 21.15% 21.14% 21.03% 12.85% 17.84% 9.15% 18.16% 6.43% 18.79%Historical Returns/Risk -0.13 -0.25 -0.25 0.29 -0.09 0.81 0.10 1.09 0.08Historical Skewness 0.11 0.12 0.01 -1.53 0.63 -2.03 0.39 -2.20 0.24Historical Kurtosis 7.74 7.77 6.28 19.63 27.85 33.15 18.30 49.12 12.47Maximum Drawdown -56.4% -58.2% -58.9% -28.7% -37.6% -18.2% -38.3% -11.3% -42.4%Tracking Error to the SMIC Index 0.00% 5.92% 1.04% 29.77% 13.53% 26.79% 10.38% 24.77% 8.35%Correlation to the SMIC Index 100.0% 99.9% 96.1% -50.4% 77.2% -48.2% 87.1% -45.9% 91.9%Beta to the SMIC Index 1.000 0.998 0.955 -0.306 0.651 -0.208 0.748 -0.139 0.817
Option Strategist - Covered Call: Based on Historical Data from Jan 1st 2006 to Nov 15th 2010 - Net of Fees
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 3
Option Strategist Historical Efficient Frontier
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
0% 5% 10% 15% 20% 25%
Historical Volatility (in % p.a.)
His
tori
cal R
etu
rns
(in
% p
.a.)
SMI TOTAL RETURNSWISS MARKET INDEXCSETF ON SMI Ex-DivCovered Call Strategy: 2.5% OTMCSETF ON SMI Ex-Div and the Covered Call Strategy: 2.5% OTM
Based on Historical Data from Jan 1st 2006 to Nov 15th 2010
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 4
� Options offer portfolio managers unrivaled tools to enhance their
performance and to better manage their risk exposures
� Multiple passive option-based investment strategies have offered and offer more attractive return and risk profiles in a mean-variance context than traditional passive investment strategies on similar underlying assets.
• Covered call strategies consist in systematically selling one-month out of the money calls and rolling those positions at expiry. This systematic approach does not require any decisions in terms of market timing.
� Covered Call strategies offer attractive payoff profiles:
• Historically offered higher investment performance
• Display asymmetric payoff profiles
• Offer lower variance and drawdown risks
� though passive and implemented in a mechanical manner, this strategy dominates the efficient frontier on a historical basis.
Option Strategist Covered Call Strategy
In a historical mean-variance context, this strategies offers significantly higher Sharpe ratios
RATIONALE
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 5
Option Strategist Performance
0
20
40
60
80
100
120
140
160
180Ja
n-06
Mar
-06
May
-06
Jul-0
6
Sep
-06
Nov
-06
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep
-10
Nov
-10
Co
mp
arat
ive
Per
form
ance
- B
ase
100
on
Jan
1st
200
6
SMI TOTAL RETURNCSETF ON SMICSETF ON SMI Ex-Div and the Covered Call Strategy: 2.5% OTMCovered Call Strategy: 2.5% OTM
Based on Historical Data from Jan 1st 2006 to Nov 15th 2010
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 6
Option Strategist Reduced Drawdown Risks
-36.7%
-58.9%
-100%
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep
-06
Nov
-06
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep
-10
His
tori
cal D
raw
do
wn
(in
%)
Maximum Drawdown CSETF ON SMI Ex-Div and the Covered Call Strategy: 2.5% OTM Ex-DividendsMaximum Drawdown SMI TOTAL RETURNMaximum Drawdown CSETF ON SMI Ex-Div Ex-DividendsMaximum Drawdown Covered Call Strategy: 2.5% OTM Ex-Dividends
Based on Historical Data from Jan 1st 2006 to Nov 15th 2010
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 7
Option Strategist Relative Risks and Tracking Error of the Strategy
Based on Historical Data from Jan 1st 2006 to Nov 15th 2010
0%
10%
20%
30%
40%
50%
60%
70%
80%
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep
-06
Nov
-06
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep
-10
30-D
ay H
isto
rica
l Vo
lati
lity
and
Tra
ckin
g E
rro
r (i
n %
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Historical Volatility 30-Days CSETF ON SMIHistorical Volatility 30-Days CSETF ON SMI Ex-Div and the Covered Call Strategy: 2.5% OTM30-Days Tracking Error btw:CSETF ON SMI Ex-Div and the Covered Call Strategy: 2.5% OTM and SWISS MARKET INDEX30-Days ATM Implied Volatility - CSETF ON SMI Ex-Div
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 8
Attractive historical performance� Covered call strategies introduce minimal tracking error to the underlying security� Daily returns generated by the short call position have almost systematically been
negatively correlated returns to the underlying’s returns
Option Strategist Relative Daily Distribution of Returns to the Benchmark
y = 0.7776x + 0.0002R2 = 0.8108
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
-10% -5% 0% 5% 10%
Daily Returns - Underlying Ex-Divs (in %)
Dai
ly R
etu
rns
- U
nd
erly
ing
Ex-
Div
s an
d
Co
vere
d C
all S
trat
egy
(in
%)
CSETF ON SMI Ex-Div and the Covered Call Strategy: 2.5% OTM
y = -0.2237x + 0.0003R2 = 0.2645
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10%
Daily Returns - Underlying Ex-Divs (in %)D
aily
Ret
urn
s -
Co
vere
d C
all S
trat
egy
(in
%)
CSETF ON SMI Ex-Div and the Covered Call Strategy: 2.5% OTM
Based on Historical Data from Jan 1st 2006 to Nov 15th 2010
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 9
Option Strategist Comparative Distribution of Returns to the Benchmark
0%
5%
10%
15%
20%
25%
30%
-6.0
0%
-5.0
0%
-4.0
0%
-3.0
0%
-2.0
0%
-1.0
0%
0.00
%
1.00
%
2.00
%
3.00
%
4.00
%
5.00
%
6.00
%
Pro
babi
lity
Dis
tribu
tion
Fun
ctio
n (%
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cum
ulat
ive
Dis
tribu
tion
Fun
ctio
n (%
)
Proba. Dist. F(). SMI TOTAL RETURNProba. Dist. F(). CSETF ON SMICumul. Dist. F(). SMI TOTAL RETURNCumul. Dist. F(). CSETF ON SMI
0%
5%
10%
15%
20%
25%
30%
-6.0
0%
-5.0
0%
-4.0
0%
-3.0
0%
-2.0
0%
-1.0
0%
0.00
%
1.00
%
2.00
%
3.00
%
4.00
%
5.00
%
Pro
babi
lity
Dis
tribu
tion
Fun
ctio
n (%
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cum
ulat
ive
Dis
tribu
tion
Fun
ctio
n (%
)
Proba. Dist. F(). SMI TOTAL RETURNProba. Dist. F(). SWISS MARKET INDEXCumul. Dist. F(). SMI TOTAL RETURNCumul. Dist. F(). SWISS MARKET INDEX
0%
10%
20%
30%
40%
50%
60%
-6.0
0%
-5.0
0%
-4.0
0%
-3.0
0%
-2.0
0%
-1.0
0%
0.00
%
1.00
%
2.00
%
3.00
%
4.00
%
5.00
%
6.00
%
Pro
babi
lity
Dis
tribu
tion
Fun
ctio
n (%
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cum
ulat
ive
Dis
tribu
tion
Fun
ctio
n (%
)
Proba. Dist. F(). SMI TOTAL RETURNProba. Dist. F(). Covered Call Strategy: 2.5% OTMCumul. Dist. F(). SMI TOTAL RETURNCumul. Dist. F(). Covered Call Strategy: 2.5% OTM
0%
5%
10%
15%
20%
25%
30%
35%
-6.0
0%
-5.0
0%
-4.0
0%
-3.0
0%
-2.0
0%
-1.0
0%
0.00
%
1.00
%
2.00
%
3.00
%
4.00
%
5.00
%
6.00
%
Pro
babi
lity
Dis
tribu
tion
Fun
ctio
n (%
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cum
ulat
ive
Dis
tribu
tion
Fun
ctio
n (%
)
Proba. Dist. F(). SMI TOTAL RETURNProba. Dist. F(). CSETF ON SMI Ex-Div and the Covered Call Strategy: 2.5% OTMCumul. Dist. F(). SMI TOTAL RETURNCumul. Dist. F(). CSETF ON SMI Ex-Div and the Covered Call Strategy: 2.5% OTM
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 10
� Covered Call Strategies offer a simple, transparent and liquid alternative to tap the most recognized and documented source of alpha:
� Covered call strategies are an easy and efficient way to monetize volatility: an approach that offers mechanical investment protocols with clear statistical return characteristics, and attractive historical track-records.
� Historically, the strategy has produced significantly higher returns with lower realized volatility when compared to the underlying security, resulting in attractive Sharpe ratios.
� Covered Call strategies are structurally short volatility strategies that allows investors to exploit one of the very few sources of academically recognized and widely documented market inefficiency, that is the non-convergence between implied and realized historical volatilities.
Option Strategist Simple and Transparent Approach to Tap Alpha Sources
Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.com Page 11
� Asset Management: a harsh competitive landscape� Investors biases:
• Asymmetric risk preferences• Higher sensitivity to short-term portfolio performance
� An industry anchored in the mean-variance space
� Covered Call strategies offer attractive payoff profiles:� Historically offered higher investment performance� Display asymmetric payoff profiles� Offer lower variance and drawdown risks
� A simple, flexible and transparent investment strategy� Systematic management of the contract roll: no decisions are necessary
in terms of timing.
Covered Call StrategyVolatility: A Key Complement To Achieve Higher Portfolio Efficiency
