JohnnyQ
Junior Member
Posts: 5
Joined: Nov 2002
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Sat Mar 08, 08 08:55 PM
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Hi,
There was a previous tread on Wilmott describing a Split-Strike Conversion Strategy.
In essence, the strategy goes long a subset of securities from a liquid equity index (say, 35-50 stocks out of the S&P 100 Index). Then there is a collar overlay strategy on the index itself (buy out-of-the-money S&P 100 put and sell out-of-the-money S&P 100 call). The strikes of the options can vary over time but typically they are not more than 5% out-of-the-money and are rolled over frequently (1-3 month duration). The notional amounts of the collar are equivalent to the notional amount of the underlying long equity portfolio.
In analyzing the historical returns the strategy has virtually no drawdowns .... and very consistent performance (7-9% per annum with less than 2% volatility). The strategy is implemented by a proprietary trading group at Madoff Securities (a large securities market maker as well). Without actively timing the market (ie, short term long/short bias) I am wondering how you can get that kind of risk/return out of the strategy? If you are activley timing the market, surely you will have some losing bets .... If you are passive, even though the moneyness of the collar can vary, it seems to me that the volatility skew works against you and you will be forced to give up more upside for less downside protection ....
So, I am at a loss ... Can anyone shed more light on this or has anyone heard of the this Split-Strike Conversion Strategy before?
Thanks,
JohnnyQ
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JohnnyQ
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