aod report v3

8/3/2019 AOD Report v3

1/18

CONTENTSFund Overview...........................................................................................................2

Executive Summary...................................................................................................3

Commodity Trades.....................................................................................................4

1. Corn Straddle.................................................................................................4

1.1 Investment Thesis.......................................................................................4

1.2 Strategy......................................................................................................4

1.3 Derivative Instrument Used........................................................................4

1.4 Execution....................................................................................................5

1.5 Payoff Analysis............................................................................................5

1.6 Other Learning Points.................................................................................6

2. 1. Crude Oil.......................................................................................................7

2.1 Investment thesis.......................................................................................7

2.2 Derivative Instruments Used......................................................................7

2.3 Execution....................................................................................................7

2.4 Payoff Analysisfor our trade........................................................................8

2.5 Other Learning Points.................................................................................8

3. Gold..................................................................................................................9

3.1 Investment thesis.......................................................................................9

3.2 Strategy......................................................................................................9

3.3 Derivative Instruments Used......................................................................9

3.4 Execution..................................................................................................10

3.5 Payoff Analysis..........................................................................................11

3.6 Other Learning Points...............................................................................12

Equity Trades...........................................................................................................13

4. Las Vegas Sands Corp.....................................................................................13

4.1 Investment Thesis.....................................................................................13

4.2 Strategy....................................................................................................13

4.3 News.........................................................................................................13

4.4 Payoff Analysis..........................................................................................14

Payoff Analysis


2/18

Investment Objective

Our xxx fund invests primarily on theequities and commodities market. With theutilisation of derivative securities, we aimto achieve long-term capital appreciationwith moderate volatility and risk.

Market Overview

CommoditiesUnpredictable weather, natural disaster

and political instability have given rise tosupply shocks in the world of commodities.Greater affluency and the surge in demandfrom China and to a lesser extent, Indiaand the rest of Asia will increaseconsumption demand. With greateracknowledgment of commodities as aninvestable asset class, our team isoptimistic that this segment of the financialmarketswill continue to grow.

Equities

2 years into the financial crisis, equitymarkets even though on the route torecovery, are still a far cry from where theywere at the peak in the late 2007. Today,with optimistic data (unemployment,consumer confidence) coming out from theUSA, fuelled by the momentum of grow inthe Chinese and developing worldeconomies, our team believes that thereare still a lot of room for the equity marketsto run.

SALVIN LOOK HERE!

Fund Summary

Fund Performance

Fund Allocation (as at 19th

March 2011)

Fun

dOvervie

w

Launch Date 16th Feb 2011

Fund Size SGD 10,000,000

Total Returns 16.19%

NAV SGD11,691,053

MTD

change

YTD

change

S&P GoldmanSachs

Commodity

Index

1.82% 8.86%

Energy 4.18% 12.16%

Agriculture -3.74% 3.46%

Livestock 2.26% 4.33%

Precious

Metals 0.77% 1.43%


3/18

This report will focus on how we utilized futuresand options trading strategies we have learntthroughout the course in conjunction with ouranalysis of macro-driven events to invest in theequities and commodities markets.

We have mandated our trading window to be at 4 weeks; and have set our expected returnsat an annualized rate of 20%.

Our team adopted a market driven investment strategy. Our priorities are to continue togrow our asset under management while seeking to balance between cost reductions andgrowth opportunities in these volatile markets. We successfully incorporated the use ofstructured derivatives into our trading ideas (straddle for long volatility and butterfly spreadfor short volatility etc) and have also utilized the concept of option Greeks to assist inhedging of our open positions.

Leveraging on our financial strength and aligning the business to the environment, wemanaged to obtain a 16.19% return on our portfolio, and its NAV stands at SGD11,691,053today. We also managed to unwind most of our positions as Cash and Cash Equivalent now

represents 65% of our portfolio allocation. The rest are held in stock, future options, futuresand options.

Top 5 Holdings Sector %

Apple Inc Technolo

gy

19.2

Gold Commodi

ty

8.2

Las Vegas Sands

Corp

Services 4.4

Dow Jones Index Index 1.6

Oil Crude Commodi

ty

0.1

Exe

cutiveSum

mary


4/18

1. Corn Straddle

Com

modityTra

des


5/18

1.1 Investment Thesis

In light of the highly volatile global

economy towards the end of February, we

felt it was a right time to diversify our

portfolio and venture into the future

options market of the agriculture sector.

Though we found our choices limited

merely to Corn Future Options, we still

proceeded and implemented a strategy

that could maximise returns in times of great uncertainty.

Our preferred options strategy was actualize based on several conflicting findings

regarding the outlook of Corn Futures.

In India, prices dropped on 25th February following healthy forecasts of supplies

from the major producing regions of Bihar and Tamil Nadu, propelling estimates

of maize production to 20.03 million tons for 2011, an increase of almost 20%from the 16.72 million tons of 2010.

On the same day elsewhere in the United States, Corn prices rose 3.7%, or 25.5

cents to $7.22 a bushel after the U.S Agriculture Department reported huge

jumps in export figures which were above analyst expectations.

Global supply squeeze due to bad weather conditions in major crop producing

regions such as Australia, China and Russia and increase demand from emerging

markets.

The impact the turmoil in Middle East has on Corn Futures prices is very

unpredictable. Firstly, food prices fell when the cost of oil spiked as people cut

back on food expenditure in anticipation of spending more on energy. However,an increasing proportion of world corn output is used to manufacture ethanol/bio

fuel, thus, if oil and energy prices increase, so would that of bio fuel and corn.

1.1 Strategy

Given the various factors exerting opposing effects on the price of Corn Futures, we

felt prices would swing either way. Thus we decided to bet on the volatility of the

prices and implemented a Straddle. The Straddle strategy involves buying an equal

amount of May corn futures call and put options with the same strike price.

1.2 Derivative Instrument Used

Corn Call Future Options

Corn Put Future Options

1.3 Execution

25 February 2011 May Corn Futures

Price: $7.22

er for 1000 May Corn Futures Put Options at $7.25pired, NOT Filled]-Enter order for 50 May Corn Futures Call & Put Options at X=$7.25

[Order Not Filled[Order expired, NOT Filled]

Figure 1.1: Graph of Corn Price

Source: http://www.traderslog.com/quotes-charts/?sym=C!

Figure 1.2: Timeline for Execution of Corn Trade


6/18

We begin by placing orders for

1,000 call and put options for May

Corn Futures with strike price of

$7.25. The order expired and thus

could not be filled.

28 February 2011 May Corn Futures

Price: $7.23

We placed orders for 500 calls and

puts, and then 50 of each but they

all expired yet again. Thus, we

lowered the orders to match the

days volume of 3, and were finally

successful in executing the

Straddle.

1.1 Payoff Analysis

Our options position gave us

the following payoff table.

Based on the execution of ourtrade, we would be able to

profit if May Corn Futures

prices were either:

1) More than $8.23 OR

2) Less than $6.27

Due to the nature of StockTrak, we are not able to exercise any future options.

However, even if we were allowed to do so, our returns from the strategy would not

have been impressive. Our bet on volatility was right but the magnitudes of the

price movements were not sufficient enough to ensure healthy returns.

The May Corn Futures price went as high as $7.42 on 4 th March and as low as $6.08on the 16th before recovering to $6.84 on March 18, the day our team decided to

close our outstanding positions and seize any trading activity. If we had exercised

our options during the various extreme scenarios, our profits/losses would have

been a loss of 108.15 + 34.94 187.26 = (SGD 44.17)

1.1 Other Learning Points

The biggest take away from the execution of this trade can be attributed to the lost

we suffered due to our miscalculation of the price movements we needed to offset

the cost of the options. Although, our bet on volatility was right, the required $1

swings on either side of the initial May Corn Futures was beyond realistic

expectations. Given we entered into the Straddle at a very volatile time period, we

had to pay substantial amount of premiums in order to take on our desired position.

However, if we had been more meticulous in our initial estimations, we would have

realised that expected price fluctuations could not have covered these premiums.

-Enter order for 3 May Corn Futures Call & Put Options at X=$7.25[Order Filled Straddle in action}[Order expired, NOT Filled]

Figure 1.3: Payoff Diagram for Straddle

Figure 1.4: ???


7/18

In addition, we misinterpreted the May Corn Futures and its respective Options

contracts in terms of the size stated in StockTrak. Given each May Corn Futures

contract represent 5000 bushels and the size of each Option is 50, we thought each

option contract should then translate to 5000 x 50 = 250,000 bushels of Corn.

However, it took us a while to realise that our initial understanding was not logical

given the price we paid for each option and that each Future Options carries the

weight of merely 50 Bushel of Corn.


8/18

2. Crude Oil2.1 Investment thesis

The decision to gain exposure to Light

Sweet Crude oil was an opportunistic one

as we spotted a downward decline in

prices after stability in the political

situation in Egypt was achieved. Despite

near term bearishness, we believe that oil

is undervalued due to fundamental

demand from India and China we believed

that oil prices will continue rise.

2.2 Strategy

To gain exposure to the rising trend of oil

prices, we decided to buy into Crude Oil

Futures.

Despite this opportunistic window, we

want to avoid catching the falling knife

and gaining exposure as the markets

tank. As such, we have decided the cover

the downside risk with Put Futures

Options.

2.3 Derivative Instruments Used

Crude Oil Futures

Cure Oil Put Future Options

2.4 Execution

In terms of execution, the trade was not

so smooth.

On 16th February, we managed to

successfully gain exposure through 200

lots of Crude Oil March Futures. However,

our corresponding put position was not

filled.

On 17th February, in order to more

effectively hedge our futures position, we

decided to delta hedge our position. We

calculated that the delta of the put

options was approximately

On 22nd February, the Crude Oil March Futures position expired. However, we were

unable to sell off the options futures position 0.50, and decided to buy into 400 put

option. The order was successfully

filled.

-Enter order for 200 April Put Options Futures at X=$84

[Order NOT Filled]

Entry: $84Entry: $84

10%

-Unable to enter sell order for 400 April Put Options Futu

[Order NOT Filled]

Figure 2.1: Graph of Crude Oil Price

Figure 2.2: Timeline for Execution of Crude Oil Trade


9/18

2.5 Payoff Analysisfor our trade

Overall, our speculative trade with a hedge on downside risk was successful and we

managed to net an overall profit from the strategy of $1,723,787.

However, we would like to highlight that the profit from the strategy was dampenedbecause we were unable to exit our future option position due to constraints of

using Stocktrak.


Why not dynamic hedging? For our trade, we decided to use delta hedging to

more effectively hedge our downside risk. However, instead of dynamically hedging

our position, we chose to use the hedge-and-forget method instead. The reason for

this is because dynamic hedging is far too expensive because the need to rebalance

the portfolio to maintain delta neutrality becomes prohibitively expensive when

taking into account the transaction costs incurred on trade. It is much more feasiblefor a large portfolio of options, where only one trade is necessary to zero out delta

for whole portfolio. Hedging transactions cost are absorbed by the profits on many

trades.

Furthermore, we feel that this hedge is effective because if crude plunges, the delta

of our put option would increase to provide us with higher downside protection than

what is required for our futures. On the flipside, if crude rises, the delta of our put

option decreases which minimizes the dampening on profits

Qty Cost of

Execution

P&L at

Maturity

Future

s

200 -10

(Commission)

2,212,282.7

0

Option 400 -488,494.80 -488,494.80

Overall 1,723,787.9

0

253% Gains

Figure 2.3: Pay-off from Crude Oil Trade


10/18

3.

4. Gold4.1 Investment thesis

Metals are considered havens in times of turmoil. With the political situation taking

place in Egypt during the trading

period, we felt that it was a good time

to increase our portfolio exposure by

investments in Gold future options. As

the price of WTI crude continued to rise

with the heightened political situation inEgypt, Gold prices similarly increased at

alarming rates.

We were keen on taking a long position

in the Gold futures options market

because we did not see the political

situation in Egypt ending anytime soon.

Speculation in the market is expected

to drive the prices of Gold higher.

However, we also acknowledged thatGold prices over the last few months

have been relatively lower with its

resistance line at 1425. Thus, despite wanting to take a long position in Gold

futures, we were also aware of the downside potential associated with it.

With a general long position in the Gold futures market, and the expectations of

prices exceeding 1435 at least in the month ahead, we decided on a strategy that

allowed us to take a heavier weightage on a long position but at the same time, to

take safe on the downside risks involved.

4.2 StrategyThe strap strategy is almost like a straddle, but it involves us buying a number of at

the money puts as well as twice the number of calls of Gold at the same strike price

and expiration date. This is because we are expecting more volatility in the near

term with Gold prices likely to move upwards instead of downwards.


Gold Put Future Options

Gold Call Future Options

Figure 3.1: Graph of Gold Price

Source: http://www.traderslog.com/quotes charts/?sym=GC!


11/18


12/18

Enter order for 300 April Gold Futures Call Options at X = $1435

[Order expired, NOT filled]

-Enter order for 300 April Gold Futures Call Options at X = $1435[Order expired, NOT Filled]

-Enter order for 150 April Gold Futures Call Options at X = $1435[Order Filled STRAP in Action]

4.4 Execution

2nd March 2011

Current Gold Price: 1437.2

Number of Gold April Put Options Purchased : 150

Strike Price: $1435

Contract Size : 100

Price paid per option : $23.60

Exchange Rate: 1.28

Commission: $10

Total costs= 150100$23.601.28+$10=S$453,130.00

-Enter order for 150 April Gold Futures Call Options at X = $1435[Order Filled]

Figure 3.2: Timeline for Execution of Gold Trade


13/18

We chose a strike price of $1435 because the exercise prices available on Stocktrak

only allowed us to work with prices with multiples of 5. Also, on that day, we wanted

to purchase 300 Gold Future Call Options for April to structure our strategy,

however, our order was not filled. In the subsequent days ahead, we were still

unable to fill our order of 300 Gold Future Call Options for April.

9th of March 2011

Trade 1

Number of Gold April Call Options Purchased: 150

Price Paid per option: $14.30

Exchange Rate: 1.28

Strike Price: $1435

Total Costs = 150100$14.301.28+$10=S$274,570

Trade 2

Number of Gold April Call Options Purchased: 150

Price paid per option: $15.30

Strike Price: $1435

Total Costs = 150100$15.301.28+$10=S$293,770

As we had problems filling our orders for our call options, we decided to split the

orders and we managed to implement our strap strategy fully. Both trades took

place during different times of the day, and hence the difference in the price paid

for the call options. We finally managed to execute the STRAP for gold futures on 9

March 2011.

1.1 Payoff AnalysisNumber of Options Price per option Exchange Rate Commission Total Cost Date of Purchase

Buy April Put Future Option at 1435 150 23.6 1.28 10 (453,130.00)$ 2/3/2011

Buy April Call Future Options at 1435 150 14.3 1.28 10 (274,570.00)$ 9/3/2011

Buy April Call Future Options at 1435 150 15.3 1.28 10 (293,770.00)$ 9/3/2011

Total Cost Involved (1,021,470.00)$

Profitability Gauge

Figure 3.3: Payoff Diagram for Gold Trade


14/18

Based on the fluctuations of the Gold April Futures prices from March 9 th 2011

onwards, we realised that we would not have been profitable despite the

fluctuations in the prices. We took our evaluation

on the 13th of March 2011. This is because based

we purchased our options at a relatively high cost

and the price fluctuations of Gold during the

period in which we were holding our long position

in April Gold Futures would not be able to satisfy

any situation in which we would have been able to

profit.

Reflected on the website is our current P/L based on the changes in the value of the

options in our Long position. On 13th March, the value of our future options on

Stocktrak is as follow:

Quantity Price Paid Last Price P/L

April Gold Call

Options

300 14.80 11.90 (87,000)

April Gold Put

Options

150 23.6 26.1 37,500

Net P/L (Local

currency)

(49,500)

Based on the given information, we realised that for our position on Gold April

Futures, we were not able to be profitable in both situations:

1) Exercising of futures for profit gaining

2) Option trading in which we only focused on the value of the options.


Our biggest learning point for this particular trade is that for inexperienced traders,

it is always important to cover our downside positions. Although we believed that

the Gold futures prices will have risen based on the political situation in Egypt and

the increasing investment in metals as a safe haven, we were fortunate to cover our

downside and to limit our losses to $1,021,470. Should we have purchased call

options alone and taken a large long position on gold futures, we would have mademuch higher losses.

Another learning point was that after doing any fundamental and technical analysis,

it is important to firstly create a payoff table and then decide to purchase which

options based on the prices at that point of time. It was only after we purchased the

options that we realised that we would have only been able to profit if prices were

either more than $1461.60 or lower than $1381.80 ad this would have been hard to

achieve based on the analysis that we made on Gold as an investment. The payoff

table would also have allowed us to realise the absolute amount of losses that we

would have to bear and this could have better allowed us to plan our asset

allocation strategy.


15/18


16/18

2. Las Vegas Sands Corp.

2.1 Investment Thesis

Integrated resorts developer Las Vegas Sands Corp. (LVS) posted strong earnings results inSingapore with revenue exceeding $1.02 billion since the start of opertations. In the comingquarter, most of their remaining elements in Marina Bay Sands including the ArtScienceMuseum and Light and Water show will be launched. Also, with the recently crowned Asiabest MICE Hotel title, we believe that this will drive additional visitation and produceincreased earnings. This is coupled with news that the company sees expansion in Spain.With the global economy picking up from the recession and its exposure to Asia, we believethat LVS will be a strong buy.

2.2 Strategy

Although the stock is listed on the New York Stock Exchange (NYSE), we constructed ahedge by shorting the Dow Jones Industrial Average (DJINDU) index futures as the NYSEindex futures are not available. To determine the optimal number of futures contracts toshort, we used the formula below:

Thus, we shorted 7 futures contracts to reduce market exposure for the LVS position. Wenote that this hedge is hardly perfect since LVS is not a component of the DJINDU and weare only not hedging a wide portfolio. With the worsening Middle East crisis and volatilecommodity markets, we maintain a bearish stand on the equity markets. In view of this, our

hedge is in fact a two-pronged strategy to limit our systematic risk while aiming to profitfrom the retreating index.


NYSE Index Futures

Las Vegas Sands Put Options

2.4 News

Unfortunately, SECcommissioned aninvestigation into thecompanys Macau operationsover an alledged bribery case.This happened a week afterwe bought into LVS. The newscaused LVS share price toplumment and we madesubstantial overnight lossesof about 8%. Our hedge didnot protect us against thisunsystematic risk.

Following this, we decided to shift our strategy towards buying put options on LVS to limitour downside risk. We still maintained bullish on the stock but are very wary of the

Equ

ityTrades


17/18

uncertainties in the near term. Using the volatility calculator, we determine the number ofput options to buy:


18/18

2.5 Payoff Analysis

In the end, we bought 19 put options withstrike price of US$38 at a price of $4,578.59.This protective put strategy worked and welimited our losses on further falls in LVSprices.

Although we hedged the downside of LVS using put options, we decided not to close ourDJINDU futures short positions because of the bearish view on the equity markets after theMiddle East crisis worsened.

aod report v3

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