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Transcript of Stocktrak Report
Premise: Mutual Funds have advantages such as higher diversification and divisibility, lower risk, and lower transaction costs.
Fundamentals: There are two basic principals we consider to decide which fund to choose.
-The trend of growth. Options Objective - To build a synthetic options portfolio that maximizes return with the beta (volatility) of the stock in one direction
Premises - An options contract is a high-risk high-volatility financial product which works on the concept prepaid leverage (premium)
Puts Hedging Reasons for implementation - Future Options Objective - To get arbitrage from future options market
Premise - We assume the market is a place from which we can arbitrage. Thus, we buy futures options when there is an enormous event happen.
Buying call options of crude oil before the hurricane sandy
Buying put options of crude oil after the election of US
Lesson: Arbitrage assumption is risky Deborshi Ghosh
Genxu Zhou Credits Equities Exchange-Traded-Funds Hedging Performance Analysis The Portfolio Theory used for the Theta Portfolio was Modern Portfolio Theory (MPT), which attempts to maximize portfolio expected return for a given amount of portfolio risk.
A Trade-off between risky and risk-free was supported on the basis of risk premium.
Hedging was done with the help of Covered Call Options to reduce the effective cost prices of the underlying assets by collecting the premium.
The Sharpe Ratio of our Portfolio was -0.04. Conclusion Overall our portfolio produced a positive return, and a considerable alpha over the S&P Index. We made several mistakes during the process, and saw negative returns in the Options market but covered our losses with future options. Over the course, we developed a stronger strategic system and found our portfolio better hedged. We now find ourselves more knowledgeable, and comfortable in the world of investments. Objective - Covering an open long position on a security against downside risks.
Premise - Covered calls investing strategy generally outperforms an overall market benchmark in neutral and bearish years. A slight outperformance by covered calls might also be expected in slightly bullish years.
Fundamentals - There are 2 basic methods of hedging against downside risk through derivatives :
(i) Put Option - A put option is a contract that allows the buyer to sell 100 shares per contract of the underlying asset at a given strike price before an expiration date.
(ii) Covered Call Option - A covered call option is the reverse or short position of a call contract which obligates the seller of the contract to sell 100 shares per contract of the underlying asset at a given strike price before an expiration date should the buyer exercise his contract. Benefits:
1. Reducing the effective Cost Price per unit
2. No margin is required to be posted
3. The seller profits from the time decay on the short time-period contract, improving his position with the passage of time.
4. The seller gets to optimize his profit for the given price.
5. The seller can enter into a new contract and collect more premium if the current option expires unexercised. Downsides:
1. The profit is locked on a given set of securities.
2. The secuirty risk is entirely held by the selling counterparty.
3. Downside risk is minimized but not eliminated. Objective - To create an equity portfolio that outperforms the S&P 500.
Premises - Over a period of time, equities produce more return than the risk free rate. Also, large Cap Equities perform better than small cap over a period of time.
Fundamentals and Method of Implementation-
Firstly, the S&P 500 recommendation on the stock.
Secondly, 1-yr target price estimate.
Thirdly, the PEG ratio for all stocks were considered. Objective - We wanted to invest in bonds to diversify our portfolio and because of their lower volatility and risk compared to equities.
Premise - Investments in risky high yield bonds have a better rate of price return, while investment in lower risk bonds have lower return but lower default risk.
-Interest rates are very low, so it is not posible to generate low-risk income.Thus, high-yield bonds make for attractive investments.
-T-Bonds have a long maturity and have a couponpayment every six months like T-notes. They are virtually risk-free which allows us to diversify our risk. Objective - A significant part of the stock portion of our portfolio was invested in Exchange-traded funds, or ETFs
Premise - ETFs allow us to diversify our portfolio by investing in funds that track indexes and commodities
Fundamentals - First we invested in SPY, SH, and SHY ETFs
Commodity ETFs track the value of the underlying commodity and have historically maintained low correlations to stocks and bonds.
Commodities have also historically shown high correlations to inflation.
Diversification of portfolio with other ETFs Analysis Portfolio Name - teamtheta
Value - $1004384.70
Cash Balance - $285664.17
CashSum - $717633.64
PctReturn - 0.44%
AccruedInterest - $322.74
MarketValueLong - $723070.53
MarketValueShort - $4350.00
MarginRequirement - $15329.00
TradesMade - 60.00
OrdersMade - 75.00
YesterdayValue - $1003338.59
LastMonthValue - $925499.06 The objective of this portfolio was to develop a systematic portfolio that generated a return over the S&P 500 Index.
In Order to do so, we went step-by-step with a top-down approach. We started with the Asset Allocation which we improved as we went along the portfolio.
The focus was always maintained on the fundamentals. We only made trades when we had a firm reason and the fundamental analysis would agree with the same. As such, we are pleased with how the process went and we hope to convey the experience to you with this presentation.