Neutral Strategies – This paper provides details of our Market Neutral option trading strategies.

The Terrapin Market Neutral Strategy uses conservative stock option strategies to generate monthly income.  Options originally were designed to reduce investments risk.  Some traders use options to profit from speculation on which direction the market will move. This risky speculative approach is not how we use options.  As the name implies, our strategy does not attempt to predict market direction in order to profit but uses options to profit whether the market goes up or down within a certain range.  By selling options to other investors on the market outside a specific range, the market neutral strategy collects option premium every month. If the market were to enter an abrupt phase of moving higher or lower, the strategy employs an adjustment mechanism to prevent or minimize losses.  Over time, month after month, option premium is collected from speculators.  Our strict risk management allows us to collect this steady premium while preserving our principal when the market becomes volatile.

Each month we place the option trades at roughly the same number of days until option expiration.  Depending on market behavior, one of three outcomes transpires.  First, the trade can be exited at our desired profit.  Sometimes this can happen in one week, while other times it may take up to 30 days.  Secondly, the trade can reach our max loss point and be stopped out.  Third, the trade can be adjusted if enough time remains before expiration.  Each and every month, we enter the trades and then fully exit the trades with either a profit or loss.  This allows us to monitor our performance on a monthly basis.

Each of our Terrapin Model Portfolios allocates a portion of the portfolio to the Market Neutral program.  The minimum allocation is $20,000.  As the returns accumulate in the account, cash is distributed by our rebalancing algorithm to other asset classes, creating a dollar-cost-averaging effect.

Over time, we expect the Market Neutral Strategy to yield between 1-2% per month.  In months when the market  shows extreme volatility we expect to be stopped out of our trades and show a loss.  Over time the market spends much of its time in a sideways trend-free pattern and our strategy performs very well.

One of the tenets of modern portfolio theory is the concept of combining assets classes that have low correlation of returns.  Even if an individual investment by itself has high volatility, by adding it to a diversified portfolio of several asset classes, overall risk is reduced.  This is the main benefit to adding our Market Neutral Strategy to a well-diversified portfolio.  When most investment classes are drifting aimlessly, our strategy will yield positive returns.  The combination is very powerful.

View month-to-month performance of the Market Neutral Strategy.