liam mescall trading report

8/4/2019 Liam Mescall Trading Report

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Group Trading - Report

Overall Strategy

Given the three-week time horizon, our investments will be; based on our interpretation

of market sentiment; volatility predictions and event driven with focus on the economic

calendar. We have completed this task by identifying events and potential changes in the

marketplace and then constructing a series of transactions to take advantage of this.

Strategy 1

Bull spread on S&P 500 Index

Rational:

Strategy implemented two days before the Fed announcement regarding further bouts of

quantitative easing. Analyst estimates of $500 billion over the following six months

appear to have been priced into the market and any increase on this amount would give

momentum to a rally. We do not see any amount coming in lower than the $500bn as this

would give rise to widespread panic (as mostly priced in already) on both a US and

global scale, something the fed is trying to avoid per Ben Bernanke August 27th

speech.

We consider a far greater chance that more, rather than less funds will be announced and

as a result gains of c. 2% will be noted in the S&P over the next seven days at which time

the position would be closed out.

Call options were sold to generate revenue and minimize the cost of the overall

transaction. An announcement that would give rise to a movement above the 1275 mark

would cause volatility the fed is trying to avoid and we consider the potential for this as

being minimal.

Execution:

While S&P level at 1221:

Buy 65 call options with strike price 1225

Sell 100 call options with strike price 1275


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Results:

$600bn a month over the coming seven months announced and modest gains noted.

Position closed out at 1214.

Position P&L:

Purchase Price Sale Price Gain/Loss Quantity Multiplier $ Value

Long 8.00 1.00 (7.00) 65.00 100.00 (45,500.00)

Short - sold calls 0.85 0.08 0.77 400.00 100.00 30,800.00

Total (14,700.00)

Assessment:

Predictions were accurate and the market initially increased 1%. The announcement

brought with it a reduction in volatility as it moved from 10% to 8% bringing the options

further out of the money. As maturity approached (bought with 14 days left) the value of

the options quickly decreased over the four days as they were out of the money. The

calming effect of the extra funds introduction on volatility should have been considered

at inception.

Strategy 2

Butterfly spread on Citigroup

Rational:

When entered into, Citi had enjoyed a gradual 15% price gain during the year (range of

$3.88 -> $4.14 for last week), impressive Q3 results previously announced in September

and the prospect of further liquidity being injected into the banking system in the coming

months (which we consider already priced in). We anticipate the stock to continue in this

range and move slightly back towards $4 over the coming days after which time we willliquidate the position. The cal options sold are relatively ATM and accordingly have

lower implied volatilities (volatility smile), which is suited to maintaining the trade in the

range required. Ideally the underlying asset price will be equal to the middle strike price

(i.e. $4).


3/8

Execution:

While level at $4.14:

Buy 100 call options with strike price $3.50

Buy 100 call options with strike price $4.50

Sell 200 call options with strike price $4

Results:

A flurry of good news stories including; bargain purchase of M&T shareholding from

AIB, unexpected favorable ruling in EMI lawsuit and unexpected positive US economy

news in non-farm payrolls boosted price through range created.

Position P&L:


Long 0.77 0.86 0.09 100 100.00 900.00

Long 0.06 0.04 (0.02) 100 100.00 (200.00)

Short 0.28 0.32 (0.04) 200 100.00 (800.00)

Total (100.00)

Assessment:

Range created was too narrow. While a smaller range would reduce profitability, the

downside of breaking through the range greatly outweighs the upside of a small

increment on modest profit as reflected in the results.

Strategy 3

Bull spread on Toyota

Rational:This position was adopted prior to the announcement of Q2 results. To this date, 70% of

companies announcing results during earnings season have beat analyst estimates with

the majority enjoying equity price rises as a result. We consider this a sign of an

improvement in the world economy, which companies in the manufacturing and sales of

higher end goods will benefit from. This trend has also been noted in Q3 results


4/8

announced by Hyundai on the 28th-Oct, which we consider a reasonable benchmark for

the health of the Asian car industry.

Call options also sold to reduce cost and establish a range we think the share price will

increase to (our estimate being $76 maximum at which point we liquidate).

Execution:

While level is at $72.73:

Buy 100 call options with strike price 75

Sell 250 call options with strike price 80

Results:

Estimates beaten and forecast revenues and earnings for year raised. Position closed out

at $75.25.

Position P&L:


Long 1.27 2.96 1.69 100.00 100.00 16,900.00

Short - sold calls 0.22 1.02 0.22 ** 250.00 100.00 5,500.00

Total 22,400.00

** Options sold were OTM and not exercised therefore premium is profit.

Assessment:

Two days after trade initiated, we considered the effects of the good results to be running

out of steam, we are not aware of any other reason the position may increase/decrease

and accordingly are liquidating. In hindsight, our target of $76 was reached two days later

but we are unsure if this is due to results or other factors.


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Strategy 4

Straddle on Amgen

Rational:

Pending earnings release on 15th November. Stock has been trading between $51 and $58

from Sept to October with no apparent reason other than general increase in overall

health of economy (price tracks S&P almost identically up to last week). Forthcoming

speech from President Obama where expected to address the decision to accommodate

affordable healthcare for all and how this will be achieved, if does so may source certain

supplies from abroad (currently in Delhi, on trade mission) but decision unknown as seen

as taking jobs and investment from US which gives rise to scope for volatility. Impliedvolatility currently at c. 30% (as the shares would require a c. 8% move to hit the strike)

we consider these to be considerably out of the money and would expect a greater

implied volatility per volatility smile. A market correction bringing the value of the

implied volatility to what we believe is the correct level will increase the value of both

options.

Execution:


Buy 100 calls with strike $50

Buy 30 puts with strike $50

Results:

Results meet analyst expectations and price recedes continuing to track S&P (after QE2

initial rise). Obama does not address issues in his speech.

Position P&L:


Long 7.55 5.60 (1.95) 100.00 100.00 (19,500.00)

Short 0.7 1.30 0.60 30.00 100.00 1,800.00

Total (17,700.00)


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Assessment:

Option price tracked underlying and minor decrease in volatility noted after results. In

hindsight, the correlation with the S&P focuses the risk of two positions on the S&P

performance. As an individual trade, and using our previously stated predictions for the

S&P and inclusion of earnings announcement the position appear suited to this volatility

trade.

Strategy 5

Gamma Delta neutral position on Pepsi

Rational:

This position aims to take advantage of the time decay element and keep the value of the

position stagnant. The past weeks have seen important economic announcements in the

US (QE2 and employment announcements), which have been priced in and even with

announcements of this magnitude the trading range moved between c. 2%. Also, the

coming days have no such announcements scheduled. To free up capital and risk limits,

all positions have been closed except a small Amgen holding which will be closed

following day 4. This allows us assume a large position to maximize profits, as margins

are small. Net theta from this position is $268 per day. We are aware that the options are

near being ATM and as a result, Gamma is more susceptible to sharp increases as time

goes by. To combat this we have also made the position delta neutral and we do not intent

on holding the position for more than two days. The call options purchased are ATM and

accordingly have low implied volatilities, which is suited to a trade of this nature.

Execution:


Buy 400 call options with strike 65

Sell 683 call options with strike 67.5

Sell 8001 shares


7/8

Results:

Over the two days, stock price moved by less than .5% with marginal changes in

volatility. Uneventful.

Position P&L:


Long 0.92 0.89 (0.03) 400.00 100.00 (1,200.00)

Short-calls sold 0.24 0.21 0.03 683.00 100.00 2,049.00

Short 64.68 64.69 (0.01) 8,001.00 1.00 (80.01)

Total 768.99

Assessment:

Position performed as anticipated. Gamma and Delta risk were negated with small profit

made.

Risk Management

To monitor limit thresholds a workbook was set up (refer attached). Individual positions

(and the sum of live positions) were tested for proximity to volatility, price and time

limits. The cumulative effect for each of these limits was then considered in appropriately

named tabs every two days until portfolio liquidation. No instance of limit breach was

noted.

Portfolio Assessment

From the outset it was decided to monitor limits closely and conservatively so as to allow

flexibility to implement a position requiring large limits such as the Gamma position.

The portfolio constructed has a long volatility bias:Trade Desired Volatility Observed Volatility

S&P Long Decrease

Citigroup Short Increase

Toyota Long Margnial increase

Amgen Long Decrease

Pepsi Neutral Constant


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We felt this would be appropriate as the key driver of option value is volatility and

ultimately we are trying to increase the value of our option positions. The performance of

volatility differed significantly from plan and contributed substantially to the overall loss.

The long bias was constructed in advance of the rollout of QE2, key unemployment

figures and events specific to the individual companies. While our assessment of how

these events would unfold was largely correct, we underestimated the impact of good

news versus that of bad on volatility i.e. bad news creates more volatility and good news

tends to reduce it as seen in S&P trade (leverage effect).

The long volatility bias in the portfolio creates an exposure to losses should volatility

decrease. This has been partially offset by the sale of calls in three of the trades. Our

correct prediction of good economic news allowed for the option price appreciation we

wished for but decreased volatility had a far strong impact and reduced the value of the

portfolio and with it profits.

This is a dangerous mistake to make as the calls sold could hit the strike price and be

exercised with the long call positions held in portfolio deteriorating in value as a result of

the decreased volatility The resulting losses on both positions would wipe out capital in a

short time. A reverse of the bull spread in this case would be ideal to capitalize on the

situation.

In general, our poor financial performance can be attributed to incorrect assessment of the

impact of news on volatility

liam mescall trading report

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