Hedging mutual funds with call option spreads credit hedge fund

Remember the old Certs commercial? Two mints in one? In today’s market, sometimes a trader is also an investor. Best hedge fund performance 2016 And as an investor, you may hold some core positions longer term, maybe even for years (gasp). Largest hedge funds Nothing wrong with that. Hedge fund articles For a lot of investors, core positions are mutual funds.

Perhaps you’ve tried options strategies with the intent of generating income or reducing the cost basis of core positions. What do hedge fund managers major in If they’re comprised of individual stocks, you might sell calls against them. Largest hedge fund in the world For example, if your core position was long shares in AAPL, GM, and XOM, you could sell calls in AAPL, GM, and XOM, respectively. Multi strategy hedge fund This, of course, is a covered call strategy, which limits

the upside potential of the underlying stock positions in exchange for selling the right to call your shares away.

Unfortunately, options aren’t traded on mutual funds. How to hedge funds work And mutual funds don’t always move higher. Hedge fund deutschland So since selling calls against mutual funds isn’t possible, how can you generate income on them? When Selling Calls Is Not An Option

Many big mutual funds have high “positive correlations” to big equity indices like the S&P 500, NASDAQ 100, or Russell 2000—so when the index price goes up, the mutual fund price goes up, too. Difference between hedge fund and mutual fund And when the index goes down, the fund price goes down, too. Hedge fund index Which makes sense. Quant hedge fund Because most big mutual funds contain many of the same stocks in the larger indices, particularly if the fund’s objective is to track a particular index.

Conveniently, there are options on the big indices whose symbols are SPX (S&P 500), NDX (NASDAQ 100), and RUT (Russell 2000). Hedge fund fraud Since selling a call on an index like SPX isn’t “covered,” if you’re a qualified options trader, you may consider selling out-of-the-money (OTM) call verticals in those index options, in combination with your mutual fund, to mimic what you do when you sell calls against stocks.

With OTM short call verticals on SPX, you have defined risk equal to the difference between the long and short strikes, minus the credit received. Hedge fund performance 2014 Therefore, the cash requirement can be low. Citadel hedge fund salary And if your fund is in an appropriately approved IRA, you can typically sell call verticals. What is the hedge fund There are generally three steps to this process:

Correlation reveals the strength of the price relationship between two symbols (e.g., an index and a mutual fund) for a certain amount of time. What does a hedge fund administrator do Explore the correlation by firing up the Charts tab in the thinkorswim® trading platform by TD Ameritrade, and refer to Figure 1.

To correlate a fund against an index, follow the steps above in the Charts tab of thinkorswim. Hedge fund mutual fund Source: thinkorswim by TD Ameritrade. Equity hedge fund For illustrative purposes only.

First, go to Charts and type in the fund symbol, minus the symbol of the index it’s most closely tracking—such as SPX (if the fund tracks the S&P 500). Hedge fund lawyer salary For example, “MNKYX SPX”.

Next, go to the Edit Studies menu and select “Pair Correlation” from the studies list. Mutual funds hedge funds This adds a study to the chart that shows the correlation between your two symbols, MNKYX and SPX.

The default amount of time for the Pair Correlation study is 10 days, which you can edit. Hedge fund manager The strongest correlations are high no matter what timeframe you look at.

Correlation is measured between +1 (the fund and the SPX always move up and down together), and -1 (the fund and the SPX always move in opposite directions). Hedge fund trader A correlation of +1.00 is strong. Hedge fund define But I would consider anything above 0.80 as a high correlation. Viking global investors hedge fund For example, if you see that the correlation between your fund and the SPX is +0.99 for 10 days, but only +0.50 for 30 days, the correlation may not be stable or strong, and you may not want to be mixing SPX options with that fund. Hedge fund return on investment Maybe try another index, like NDX or RUT. Hedge fund trader salary But if the correlation is +0.99 for both 10 days and 30 days, the correlation is more reliable, and that index might be considered a good candidate in which to sell call spreads.

Now, it’s possible to lose money on both the mutual fund and short index call spread if the correlation turns negative and the fund price drops while the index rises. Top hedge funds in new york As long as the fund holds similar stocks to those in the index, the correlation should stay positive. Futures hedge fund But be aware there are no guarantees with this strategy. Hedge fund banker (Keep in mind also that spreads strategies can entail substantial transaction costs, including multiple commissions, which may impact potential returns.) Determine the Quantity of Spreads

Once you’ve identified the index correlated to your fund, how many call spreads do you need to sell? For that, determine how many SPX deltas your fund position represents, which can be found under the Analyze tab of thinkorswim.

Type in the fund’s symbol on the Analyze page. Whats a hedge fund If the fund is held in your TD Ameritrade account, you’ll see it in the Positions and Simulated Trades section. Hedge fund manager definition If not, you can enter a simulated trade that’s the same as your actual position by clicking on the “Ask” field on the Add Simulated Trades sub-tab. How does a hedge fund work Even though the Ask price is “N/A,” you can still create a simulated long position in the fund.

Tom Preston is not a representative of TD Ameritrade, Inc. Appaloosa hedge fund The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Hedge fund regulation Options trading subject to TD Ameritrade review and approval. Hedge fund best returns Please read Characteristics and Risks of Standardized Options before investing in options.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Hedge fund of funds Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Long short hedge fund Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

TD Ameritrade, Inc., member FINRA/ SIPC. Hedge fund salary TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. Largest hedge funds by aum and The Toronto-Dominion Bank. Hedge fund name generator © 2016 TD Ameritrade IP Company, Inc. What is hedge fund management All rights reserved. How to get into a hedge fund Used with permission.