investment strategy in an era of high market volatility
DESCRIPTION
Investment strategy for consistent high returns and low risk. Ideal for financial markets that have high volatility and no definite trend. In operation since October 2010, yielding a consistent return of +/-2% per month.TRANSCRIPT
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HOW TO B.O.B. ALONG IN A SEA OF VOLATILITY
Investment strategy in an era ofhigh volatility and no market direction
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Timing is everythingversustiming is worthless
With almost every indicator positively correlated, the timing of buying and selling securities demands a new investment decision strategy.
If all indicators are bullish we can definitively state that there is a very high probability that they will turn bearish, we just cannot say when.
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Trend lines go nowhere. Performance tanks but claims persist.
In this market every strategy based on predictive behaviour of the market is doing relatively poorly and at the same time every portfolio manager has an index to measure themselves favourably against.
I
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The safe nest of capital preservation is cracked
The era of buy quality assets and hold is over.
To maintain asset value above the rate of inflation demands an investment strategy that was previously defined as ‘excessively risky’.
To sit and wait for the market to stabilize and regain a firm secular bullish trend is the new ’risk’.
You are not in safe hands
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Hedge funds not on a roll
The hedge funds have not performed well
Complexity of structured products have not yielded any market advantage
Multi-Strategy Hedge fund Index for 2011 was under water
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A redefinition of risk and uncertainty
As systems evolve, they get more complex. (WTO, Euro currency zone, BRICS)
As systems become more complex they become more unstable
As systems become more unstable the components of the system must become more flexible
Therefore, new flexible strategies are needed
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A new investment strategy
Technical trading will not work.
Looking for trends will only frustrate
Sitting on cash will result in loses to inflation.
Let the market come to you. Find appropriate strategies for particular moments.
An Iterative strategy strate
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Make a series of short term decisions
Do Not: hold cash, predict the economy, identify the next disaster, chase the market, follow the cash, panic and/or despair.
DO develop strategies that exploit volatility in a no direction market and protects your portfolio from unnecessary risk. Be liquid and ready for the return of a secular boom.
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RBC auto-callable Notes are the foundation investment
What are the features of these bonds?
RBC Auto-Callable Phoenix Notes: bank issued equity linked notes that are not principal protected. They represent senior, uninsured deposit obligations of the Royal Bank of Canada.
Coupon payments, monthly or quarterly Automatically callable at observation
periods depending on the performance of the underlying assets
Conditionally principal protected at maturity
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WOF Phoenix how does it operate?
Please open your first hand out
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Step 1: Select the appropriate Bond
1: single , pairs, triples or composite
2: term ; 8 months, year 18 months, or longer
3: coupon rate 10 to 20 %
4: floor: 50% to 80%
5. benchmark dates: monthly quarterly,
6: redemption terms; cash or kind
R epresentati ve Ter ms –N ovem ber 2010.Ter m:24 m onthsU nderl yi ng A ssets: A l coa (A A – N YSE) & G eneral El ectr i c (G E -N YSE)Cur rency: U SD (CA D hedge provi di ng si mi l ar pay-off )Coupon per Month: 1. 25% (15% per annum ) i f underl yi ng(s) at observat i on poi nts > / = Coupon B ar ri er A utoCal l abl e Monthl y: I f underl yi ng( s) at observati on poi nt > / = 100% of str i ke l evel (s
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Three year range analysis of target Blue chip stocks
Rim ( red) is rejected AAPL,WFC,MSFT,APPL,JPM
,GE,FCX,,CAT, AMZN, KO , VALE, PBR are accepted
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Step 2: Multiple purchases of WOF callable Phoenix bonds
Guidelines :
1. Avoid duplication2. Vary call dates
and terms3. Diversify sectors4. Include
complements in pairs or triplets
5. Purchase monthly6. Diversify into
international markets
AutoCallable Phoenix Note JAutoCallable Phoenix Note F AutoCallable Phoenix NoteMAutoCallable Phoenix NoteA AutoCallable Phoenix NoteMAutoCallable Phoenix NoteJ AutoCallable Phoenix NoteJ AutoCallablePhoenixNoteAUAutoCallable Phoenix Note S AutoCallable Phoenix Note O AutoCallable Phoenix Note N AutoCallable Phoenix Note D
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Step 3: Acquire leverage from bank using WOF Phoenix contract as collateral
In order to increase the rate of return, a leveraging exercise is critical.
Leveraged debt creates currency hedge
Bank leverage
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Step 4: Use call spread option strategy to exploit volatility to maximize monthly return
Monthly/quarterly return on portfolio of bonds assured if contract above floor on measurement day
If any stock is under water as it approaches measurement moment, an option spread strategy is implemented, to maximize returns.
Option spread contract collapsed once monthly measurement date is passed or wait until contract expires.
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Step 5: Minimize risk of capital loss at maturity of WOF bond
As long as stock price at maturity is above floor, 100% capital returned
If stock is below floor, purchase options of negative correlate to cover the potential loss at maturity
If market is in bear cycle, then determine the best fit; (gold, VIX TBs, Euro/US) to include in option purchase. Objective to lose no more than 50% of potential loss upon maturity.
Negative Correlates
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BoB’s performance since January 2011
Please open your second hand out
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Description $ Invested Periodic
Yield Stock 1 Initial Price LASTBarrier Price
% Away From
Barrier Stock 2 Initial Price LASTBarrier Price
% Away From
Barrier
Initial Valuation
Date
Final Valuation
Date
WFC/MSFT 2 yr Monthly pay 70% barrier $ 250,000 1.22% WFC-us $ 31.81 28.59$ $ 22.27 20% MSFT-us $ 28.47 27.47$ $ 19.93 26% 19-Jan-11 22-Jan-13APPL/JPM 6mnth Monthly pay 80% barrier 100,000$ 1.35% AAPL-us 342.62$ 414.54$ 274.10$ 41% JPM-us 45.96$ 34.78$ 36.77$ -4% 23-Feb-11
CLOSED 8/23/2011
SLB/POT 1 yr Monthly pay 65% barrier 100,000$ 1.02% SLB-us 93.26$ 68.20$ 60.62$ 8% POT-us 58.93$ 43.44$ 38.30$ 9% 31-Mar-11 02-Apr-12GE/FCX 1 yr Monthly pay 70% barrier 100,000$ 1.55% GE-us 20.53$ 18.40$ 14.37$ 20% FCX-us 55.77$ 39.24$ 39.04$ 0% 04-Apr-11 04-Apr-12CAT/AMZN 1 yr Monthly pay 70% barrier 100,000$ 1.30% CAT-us 108.85$ 94.64$ 76.20$ 17% AMZN-us 185.42$ 175.85$ 129.79$ 25% 25-Apr-11 25-Apr-12GDX/KO 1 yr Monthly pay 65% barrier 100,000$ 0.95% GDX-us 60.27$ 64.11$ 39.18$ 41% KO-us 68.17$ 71.23$ 44.31$ 39% 16-Aug-11
CLOSED 09/16/2011
VALE/PBR 1 yr Monthly pay 70% barrier 100,000$ 2.50% VALE-us 23.87$ 25.41$ 16.71$ 36% PBR-us 23.30$ 27.01$ 16.31$ 46% 29-Sep-11
Closed 10/31/2011
VALE/PBR 1 yr Monthly pay 70% barrier 100,000$ 2.29% VALE-us 24.61$ 22.86$ 17.23$ 23% PBR-us 26.17$ 26.23$ 18.32$ 30% 01-Nov-11 16-Nov-12AAPL 18mnth Quarterly pay 70% barrier 100,000$ 3.25% AAPL-us 366.99$ 414.54$ 256.89$ 43% 23-Nov-11 23-May-13
Settlement
Cash
Physical
Cash/Physical
Cash/Physical
Cash/Physical
Cash/Physical
Cash/Physical
Cash/Physical
Cash/Physical
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Hedges $ Invested #
Contracts Ticker
Initial Price per
Contract
Last Price per
Contract
Total Spent/Received on Hedge
Current Value of Hedge
Gain (Loss)
% Gain (Loss)
Total Gain (Loss)
Expiration Date
1Lloyd Baron #8120176022
Hedge: 15 US Treasuries (TLT) Sept. $100 strike Calls 9,150$ 15 TLT1117I100-US 6.10$ 10.45$ 9,150$ 15,675$ 4.35$ 71% 6,525$ 16-Sep-11
2Lloyd Baron #8120176022
Hedge: 5 Gold (GLD-us) Sept $160 strike Calls 5,500$ 5 GLD1117I160-US11.00$ 21.60$ 5,500$ 10,800$ 10.60$ 96% 5,300$ 16-Sep-11Subtotal: 14,650$ 14,650$ 26,475$ 11,825$
3Lloyd Baron #8120176022
Hedge: Sold 10 FCX-us October 36 strike Calls 1,000$ (10) FCX1122J36-US 1.00$ 0.29$ 1,000$ 290$ 0.71$ 71% 710$ 21-Oct-11
4Lloyd Baron #8120176022
Hedge: Bought 10 FCX-us October 40 strike Calls (300)$ 10 FCX1122J40-US 0.30$ -$ (300)$ -$ (0.30)$ -100% (300)$ 21-Oct-11Subtotal: 700$ 700$ 290$ 410$
5Lloyd Baron #8120176022
Hedge: Sold 10 FCX-us November 37 strike Calls 1,830$ (10) FCX1119K37-US 1.83$ -$ 1,830$ -$ 1.83$ 100% 1,830$ 18-Nov-11
6Lloyd Baron #8120176022
Hedge: Bought 10 FCX-us November 40 strike Calls (730)$ 10 FCX1119K40-US 0.73$ -$ (730)$ -$ (0.73)$ -100% (730)$ 18-Nov-11Subtotal: 1,100$ 1,100$ -$ 1,100$
7Lloyd Baron #8120176022
Hedge: Sold 10 FCX-us December 37 strike Calls 1,101$ (10) FCX1117L37-US 1.10$ 0.75$ 1,101$ 750$ 0.35$ 32% 351$ 17-Dec-11
8Lloyd Baron #8120176022
Hedge: Bought 10 FCX-us December 40 strike Calls (361)$ 10 FCX1117L40-US 0.36$ 0.01$ (361)$ (10)$ (0.35)$ -97% (351)$ 17-Dec-11Subtotal: 740$ 740$ 740$ -$
9Lloyd Baron #8120176022
Hedge: Sold 10 FCX-us January 37.50 strike Calls 1,800$ (10) FCX1221A37.5-US1.80$ 2.42$ 1,800$ 2,420$ (0.62)$ -34% (620)$ 21-Jan-12
10Lloyd Baron #8120176022
Hedge: Bought 10 FCX-us January 39.50 strike Calls (940)$ 10 FCX1221A39.5-US0.94$ 1.14$ (940)$ (1,140)$ 0.20$ 21% 200$ 21-Jan-12Subtotal: 860$ 860$ 1,280$ (420)$
Cash
Cash
Cash
Settlement
Cash
Cash
Cash
Cash
Cash
Cash
Cash
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Client Description
Interest Payments Received
Total: Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12
Horizon Pacific International #8120176428
WFC/MSFT 2 yr Monthly pay 70% barrier $ 36,600 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 3,050$ $ 3,050 $ 3,050 $ 3,050
Lloyd Baron #8120176022
APPL/JPM 6mnth Monthly pay 80% barrier $ 8,100 $ 1,350 $ 1,350 $ 1,350 $ 1,350 1,350$ 1,350$
Lloyd Baron #8120176022
SLB/POT 1 yr Monthly pay 65% barrier $ 8,160 $ 1,020 $ 1,020 1,020$ 1,020$ 1,020$ 1,020$ $ 1,020 1,020$
Lloyd Baron #8120176022
GE/FCX 1 yr Monthly pay 70% barrier $ 12,400 1,550$ 1,550$ 1,550$ 1,550$ 1,550$ 1,550$ 1,550$ 1,550$
Lloyd Baron #8120176022
CAT/AMZN 1 yr Monthly pay 70% barrier $ 10,400 1,300$ 1,300$ 1,300$ 1,300$ 1,300$ 1,300$ 1,300$ 1,300$
Lloyd Baron #8120176022
GDX/KO 1 yr Monthly pay 65% barrier $ 950 950$
Lloyd Baron #8120176022
VALE/PBR 1 yr Monthly pay 70% barrier $ 2,500 2,500$
Lloyd Baron #8120176022 $ 4,580 2,290$ 2,290$
Lloyd Baron #8120176022
AAPL 18mnth Quarterly pay 70% barrier $ -
Sub Total Revenue: 83,690$ 3,050$ 4,400$ 4,400$ 6,970$ 8,270$ 8,270$ 8,270$ 7,870$ 4,350$ 9,420$ 9,210$ 9,210$
Interest Periods:
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While the bull slumbers what will you do?
Projection for 2012-2013
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Objective: to create a $12 million BoB fund
Benefits:
Choose bonds in primary market
Diversify to targeted blue chip stocks
Create new flexible contracts with specific parameters
Lower commission fees
Generate higher profits
Prescription for Expansion