Long VIX Puts
Because of the relationship between the VIX volatility Index and the corporate credit spread, T+ is able to use limited risk volatility securities[i] (long VIX puts) to generate a return that is related to corporate bonds[ii] with the goal of delivering superior absolute and risk adjusted returns
Traditional short volatility programs sell options, where the risk can cascade and grow exponentially. These programs are often accused of picking up pennies in front of a freight train, and we couldn’t agree more. The T+ strategies reduces this unnecessary risk by utilizing the defined risk of the long VIX puts, where they can, at most, lose the premium paid.
Limited and Defined Risk
By holding a small long VIX Put position, T+ is able to benefit from the volatility risk premium associated with the term structure of VIX futures in a defined and limited risk fashion.
Risk is limited because T+ can only lose the premium paid for the put options it holds, and yet can benefit from an increase in the value of those options. Unlike traditional short volatility positions that sell options, where risk can cascade and grow exponentially, the long put options have a defined risk and can, at most, lose the premium paid.
T+ defines specific rebalancing allocation limits. In the case of long VIX Put options, initial monthly allocations are limited to less than 10% of NAV[iii] . This allocation can grow over the course of the month as the VIX Puts appreciate in value, but at every monthly rebalancing the allocation is reduced back to less than 10%, limiting the risk being taken.
VIX Options Pricing
VIX options are priced as if they are options on the associated VIX future that will expire at the same time as the VIX option expires.
Because VIX futures trade at a premium to the VIX index (when in contango), as the futures contract drops in value over time, converging towards the VIX index, the associated VIX put option with the same expiration gains value. The same way a put option on any security would gain value from a drop in the underlying security’s price.
The beauty of this is that T+ can benefit from the almost constant decay in VIX futures, but in a limited risk fashion by buying VIX puts.
[i]Volatility Securities: Represented by investments in Long VIX Index puts as determined by a proprietary algorithm. Cassini reserves the right to use other VIX futures traded products, such as but not limited to, The VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV), or equity index option exchange traded products, such as but not limited to, WisdomTree CBOE S&P500 PutWriteStrat ETF (PUTW).
[ii]Comparative Benchmark Corporate Bonds (LQD): The iShares iBoxx $ Investment Grade Corporate Bond ETF seeks to track the investment results of the Markit iBoxx USD Liquid Investment Grade Index, composed of U.S. dollar-denominated, investment grade corporate bonds. Returns illustrated are net of fees.
[iii] NAV: Net Asset Value
Cassini Capital Management, LLC (CCM), is an investment adviser registered with the State of Florida; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information regarding the Strategy, including investment management fees, as well as important information regarding CCM, its services, compensation, and conflicts of interest is contained in the firm’s Form ADV Part 2 and is available upon request or at www.adviserinfo.sec.gov. This presentation is not intended for the giving of investment advice to any single investor or group of investors and no investor should rely upon or make any investment decisions based solely upon its contents. The TPlus(T+) Strategy may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Limitations of Past Performance; Possibility of Losses: Past performance does not guarantee future performance. Participation in the Strategy carries the potential for profit as well as the probability of loss, especially over shorter time periods.
Other Fees and Expenses; Impact of Taxes: The investment management fee paid to CCM is separate and distinct from the internal fees and expenses charged by mutual funds and ETFs to their shareholders. These fees and expenses are described in each fund’s prospectus, and will generally include a management fee, internal investment, custodial, and other expenses, and a possible distribution fee. Prospective clients should consider all of these fees and charges when deciding whether to invest in the Strategy. Performance results for this strategy do not reflect the impact of taxes.
Comparative Benchmark Corporate Bonds (LQD) The iShares iBoxx $ Investment Grade Corporate Bond ETF seeks to track the investment results of the Markit iBoxx USD Liquid Investment Grade Index, composed of U.S. dollar-denominated, investment grade corporate bonds. Returns illustrated are net of fees.
Charts: All charts and graphs presented are property of Cassini Fund and were created for this presentation deck. Additional source material and statistical calculation details are available upon request.