Financial Commodity Investments (FCI) Honored as a Top Trader of 2009
FCI – Diversifying Risk Brings Success
by Daniel Collins, Futures Magazine, March 2010
It is no surprise that Financial Commodity Investments’ (FCI) Credit Premium Program (CPP) did well in 2009 — most option writing programs had a good year — but it was also up in 2008, making it quite unique. FCI President Craig Kendall is a certified public accountant and longtime investor with a pretty good sense of timing. He exited real estate in 2006 and took profits in equities before the dotcom bubble burst. As an accountant who had helped take a couple of companies public, he was amazed at the valuations he was seeing in the late 1990s and knew he needed to diversify his holdings. In the early 2000s, he opened an account with famed option writer Max Ansbacher and became a protégé of his. What struck Kendall about the strategy after a conversation with Ansbacher was its simplicity, so he went about creating his own advisory. “First of all, in futures you have increased leverage and if you take some risk, the returns can be commendable but managing the risk is ever so important, especially in options writing. I don’t need to tell you that a lot of the competition is not around today,” Kendall says. So in 2003 he became a registered CTA and investment advisor. He launched his Options Selling Strategy (OSS) in 2004 and the CPP in 2006. What distinguishes both of his programs is that they trade a diversified group of markets instead of concentrating on equity indexes as most options writers do. Each program has roughly $10 million under management. “There were a lot of options writers out there and I thought why not take the same strategy and diversify it across different commodities,” Kendall says. “With this strategy we are really a short volatility play and there are times when the volatility on the S&P doesn’t warrant doing credit premium selling because the risk/return just isn’t worth it. But by doing the extra research and finding the volatility opportunities amongst various commodities [we find opportunities] to make good trades that can be a lot less risky than doing the S&P.” FCI trades energies, currencies, bonds and grains; all the major liquid markets. The downside to the diversified approach is that he is researching two dozen or so markets instead of one or two indexes. “You really have to monitor a lot more markets. [But] if we monitor all these markets and take only the safest volatility trades, we should have better returns for the clients with reduced risk.” Both programs are discretionary and look at both technical and fundamental inputs. The OSS sells mostly naked options two standard deviations out-of-the money. The CPP gets in on credit spreads and is always hedged. “Prior to putting on any trade we have a predefined stop loss. If stuff moves against us we are pretty consistent with getting out,” Kendall says. “What is discretionary is whether we roll up or whether we roll forward or roll out and we take that on a case by case basis although historically, nine times out of 10, we roll out and look for other opportunities.” Being hedged and diversified allowed the CPP to earn positive returns the last two years: 29.04% in 2009 and 6.94% in 2009. The OSS returned 38.91% in 2009 and lost 23.02% in 2008, still outperforming most programs in that space. OSS got caught in the extreme volatility in 2008, says Kendall. “We went back and looked at the volatility. We are not poker players and in 2008 it became a poker game. Right now when volatility explodes to those levels we just sit on the sidelines. We let all those opportunities pass.” The upside to writing options across a diversified group of markets is that you can afford to be choosy. “Volatility shifts from time to time,” Kendall says. “Last year we did a lot of energies, this year it has been currencies and Treasuries. We follow the volatility opportunities.” FCI will have about eight positions on at a time, in markets with the best risk/reward profile. “Our best success is when we wait for the opportunities to come to us,” Kendall says. “The best trades are when we wait and catch extreme volatility.” That happened in sugar in 2009. “Volatility really exploded. We were selling calls but we waited until we got to high prices.” Kendall says his programs are well suited for current uncommon market conditions; based on his timing and track record he may be right.
Past Performance is not Indicative of Future Results. The writer, or seller of options, takes on unlimited risk. There is no limit on how large the loss can be. Losses can and will be the amount that the option is “in-the-money” at the time of expiration, should the option actually expire in the money.
For a full performance report for FCI please send an email to courtney@colonialcapitaladvisors.com .