MANAGING OPTIONS POSITIONS

MARCH 2013
INTRODUCTION
OPTION VALUATION & RISK MEASURES THE GREEKS
PRE-TRADE
RICH VS. CHEAP ANALYSIS
SELECTING TERM STRUCTURE
PORTFOLIO CONSTRUCTION
CONDITIONAL RISK PROFILES
STRESS TESTING
BIOGRAPHIES / CONTACT INFORMATION
APPENDIX
DISCLAIMER
2
AGENDA
INTRODUCTION
MICHAEL SCHMANSKE
Glenshaw Capital, Founder & Senior PM

DAVID MITCHELL
Bloomberg, Equity Derivatives Application Specialist

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OPTIONS RISK MEASURES THE GREEKS
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DELTA
The change in the price of an option for a $1 move in the price of the
underlying stock.
GAMMA
The change in delta for a $1 change in the price of the underlying stock.
VEGA
The change in the price of an option for a one-point change in implied volatility.
THETA
The change in the price of an option given a one-day decrease in the time
to expiration.
RHO
The change in price of an option given a 1% change in the risk-free
interest rate.

OPTION VALUATION
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VALUE FILTERS
When trading an option position to efficiently meet an investment objective, an
investor must consider the variables that affect both the price and performance of the
portfolio.
Implied volatility
Volatility surface (including skew)
Conditional risks

VALUATION MODEL INPUTS
Underlying Price
Strike Price
Time to Expiration
Risk-Free Interest Rate
Volatility & Dividends

OVME <GO>
PRE-TRADE: RICH VS. CHEAP ANALYSIS
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DETERMINING RICH VS. CHEAP IMPLIED VOLATILITY
1. Use a data analysis tool to calculate the realized volatility for multiple
time periods.
2. Compare realized volatility to the current implied volatility in the
options.

3. Repeat this procedure for similar underlying assets, then compare
spreads of implied to realized volatility.
4. Consider any asset-specific catalysts (earnings, pending
announcements or macroeconomic factors) that may justify the
presence of a particular spread.

PRE-TRADE: RICH VS. CHEAP ANALYSIS
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VOLATILITY DASHBOARD
Tabs available for index, commodity and currency volatility data

VCA <GO>
PRE-TRADE: RICH VS. CHEAP ANALYSIS
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VCA <GO>
Implied correlation calculations for indices. ETFs available soon.
PRE-TRADE: RICH VS. CHEAP ANALYSIS
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GV <GO>
PRE-TRADE: RICH VS. CHEAP ANALYSIS
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G <GO>
CROSS-ASSET: SPX VS CDX

IDEA GENERATION CASE STUDY - Quantitative Analysis
FRONT
MONTH
SKEW
11
-12.6
-10.6
-8.6
-6.6
-4.6
-2.6
-0.6
1 Month 2 Months 3 Months 6 Months 1 Year 2 Years
Min
Max
Mean
99 Percentile
1 Percentile
Skew Case Study
SPX PUT SKEW
Short term skew is
priced very high to
historical levels
-$60
-$40
-$20
$0
$20
$40
$60
1100 1150 1200 1250 1300 1350 1400
IDEA GENERATION CASE STUDY - Trade Initiation
SKEWED PUT CONDOR PAYOUT
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ATTRIBUTES
Low initial premium
Short skew
Positive carry
Limits loss potential to
$55
THE PORTFOLIO
Buys 1x the 1350 put
Sells 1x the 1300 put
Sells 1x the 1250
Buys 1x the 1150 put
Net premium
investment of $5.00.
PRE-TRADE: SELECTING TERM STRUCTURE
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SELECTING THE APPROPRIATE SEGMENT
1. Use data analysis tool and graph the term structure of implied volatility
surface.
2. Compare the current implied volatility surface to the assets historical
implied surfaces.
3. Consider whether skew is relatively steep or flat as compared with the
assets historical data.
4. Observe the assets term structure to understand whether it is inverted
or upward-sloping.
5. Compare the term structure to the assets historic term structure data
and to that of similar assets.


OPTIONS RISK MEASURES
IMPLIED VOLATILITY SURFACE
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OVDV <GO>
PRE-TRADE: SELECTING TERM STRUCTURE
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OSCH <GO>
PRE-TRADE: SELECTING TERM STRUCTURE
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OMON <GO>
PRE-TRADE: SELECTING TERM STRUCTURE
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TRMS <GO>
OMON R <GO>
IDEA GENERATION CASE STUDY - Fundamental Analysis
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1050
1100
1150
1200
1250
1300
1350
1400
1450
1500
0%
5%
10%
15%
20%
25%
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12
1X2 CALL SPREAD
Implied Volatility
SPX Index
IVol SPX
-$60
-$40
-$20
$0
$20
$40
$60
1300 1325 1350 1375 1400 1425 1450 1475
IDEA GENERATION CASE STUDY - Hedging Analysis
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ATTRIBUTES
Short gamma
Short vega
Low initial premium
Useful in high volatility
environment where a
controlled rebound is
expected
1X2 CALL SPREAD PAYOUT
THE PORTFOLIO
2 Month 1350 1400 call
1x2
Buy 1x 1350 call
Sell 2x 1400 call
Net premium is $5.00
IDEA GENERATION CASE STUDY - Hedging Analysis
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1X2 CALL SPREAD PAYOUT OVER TIME
1X2 CALL SPREAD DELTA OVER TIME
OSA <GO>
PORTFOLIO CONSTRUCTION
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UNDERSTANDING CONDITIONAL RISK PROFILES
1. Recognize an options portfolio is dynamic and the goal is to create
limited loss scenarios that can be actively managed and used as
efficient trade vehicles.
2. Consider what the expected move would be in implied volatility given
different price movement scenarios.
3. Consider the impact of time on the options positions. Determine
whether the position should be unwound, rolled or otherwise hedged.



PORTFOLIO CONSTRUCTION: STRESS TESTING
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OSA <GO>
PARALLEL VOL SHIFT UP
CUSTOM SHIFT OF SKEW &
TERM STRUCTURE
PORTFOLIO CONSTRUCTION: STRESS TESTING
23
OSA <GO>
PORTFOLIO-LEVEL GREEKS
CUSTOM SHOCKS & STRESS
TESTING
PORTFOLIO CONSTRUCTION: STRESS TESTING
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OSA <GO>
PRICE SHIFT TO A BENCHMARK
WILL SHIFT PORTFOLIO
CONSTITUENTS BY RELATED BETA
DETAILS OF P/L AND GREEKS AT
EACH PRICE POINT
BIOGRAPHIES

MICHAEL SCHMANSKE Glenshaw Capital, Founder & Senior Portfolio Manager
Mr. Schmanske founded Glenshaw Capital, an equity volatility hedge fund, July 2012. Before Glenshaw, he
was a Managing Director at Barclays and the Head of Index Volatility trading. Prior to Barclays, Michael was
the Head of US Index Volatility trading at Lehman Brothers. Michael built a trading platform that became the
largest volatility trading desk in the financial services industry. Michael and his team developed a unique
trading strategy, which utilized proprietary theoretical pricing models for the VIX, skew, the volatility of volatility
and introduced a cross-asset approach to risk management. Building on this market-leading experience in the
VIX, Michael oversaw the launch of the volatility asset class platform which includes the iPath volatility ETNs
(VXX and VXZ). Michael began his trading career as a market marker for Susquehanna International Group on
the CBOE, becoming the lead trader and risk manager for high-cap index derivatives products in 1998.
He holds a BS in Aerospace Engineering from MIT and a MSE in Mechanical and Aerospace Engineering from
Princeton University. Currently, Michael serves on the board of directors for the CBOE Futures Exchange.


DAVID MITCHELL Bloomberg, Equity Derivatives Applications Specialist
Mr. Mitchell joined Bloomberg in 2009 as an Applications Specialist focusing on listed and OTC derivatives,
and also convertible bonds. In this capacity he interacts with buy-side and sell-side derivatives traders and
portfolio managers to support all related analytical, market surveillance, and transaction-related functionality
available thru the Bloomberg Professional Service. Prior to joining Bloomberg, Mr. Mitchell worked as a
Managing Director in the Structured Equity Products group at Bear Stearns & Co. Prior to joining Bear Stearns,
Mr. Mitchell worked for Deutsche Bank and Merrill Lynch in equity derivatives sales and structuring.
Mr. Mitchell has a BS in Electrical Engineering from the University of Maryland and an MBA in Finance and
Statistics from the NYU Stern School of Business..

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CONTACT INFORMATION
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MICHAEL SCHMANSKE
investor@glenshawcapital.com
+1 (646) 237-7882
www.glenshawcapital.com
DAVID MITCHELL
dmitchell28@bloomberg.net
+1 (212) 617-5606
www.bloomberg.net

APPENDIX: VOLATILITY
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HISTORICAL VOLATILITY
Aggregate measure of past price fluctuations of underlying instrument
Annualized standard deviation of the log returns;









IMPLIED VOLATILITY
Embedded prediction of future price fluctuations based on solving options-pricing
formula after including market parameters.

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APPENDIX: SENSITIVITY ANALYSIS

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HOW CHANGES IN PARAMETERS AFFECT OPTION VALUE
DELTA
Ratio of change in underlying to change in options price (1
st
derivative) Range=-1 to+1
Delta=the N(d1) term of the Black Scholes Equation
100 WTI Call. Delta is 0.52
WTI +$1.00
Option Increases by $0.52
A snapshot
A hedging parameter.
Long 100 of the 100 WTI Call. SELL 52 of the WTI Futures = Delta Neutral

GAMMA
Rate of Change of Delta wrt change in underlying price. (2nd derivative/acceleration)
Gamma=0.1/1.00 move
WTI +$1.00
Option Delta goes from 0.52 to 0.62
Highest for ATM
Used to measure the convexity of the option delta

A
I
APPENDIX: SENSITIVITY ANALYSIS
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HOW CHANGES IN PARAMETERS AFFECT OPTION VALUE

VEGA
Sensitivity to a 1% change in implied volatility.
Rule of thumb: ATM option: % change in vol=% change in options value
Highest for ATM
WTI 100c WTI=100 Call=4.00
Vega=.04
IVol 30 goes to 30.3 (1%) Option now 4.04

THETA
Time decay
The rent you must pay if Long or collect if you are short
The bleed
If trading a delta-neutral book, it lets you know how much the market has to move for the portfolio to make money





RHO
Interest rate sensitivity
Shows the sensitivity to changes in interest rates.
The model uses the risk-free rate to provide the discounting factor.

O
DISCLAIMER & RISKS
This presentation is for educational and informational purposes only and should not be construed as legal, tax, investment or other advice. This
document does not constitute an offer to sell, or a solicitation of an offer to buy
any interest. Any offer will be made pursuant to a private offering memorandum, which should be reviewed carefully before making an
investment.
Structured securities, derivatives, and options are complex instruments that are not suitable for all investors, may involve a high degree of risk,
and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved.
Prior to buying or selling an option, an investor should read and understand the booklet "Characteristics and Risks of Standardized Options."
You can access and download a copy of the booklet on The Options /Clearing Corporations'(OCC) website at
http://www.theocc.com/about/publications/character-risks.jsp. This link reference is provided as a courtesy and does not imply that the OCC is
endorsing IT or its products. This booklet is also available for free from your broker or from any of the U.S. options exchanges.

Call or put purchasing: The risk of purchasing a call/put is that investors will lose the entire premium paid.
Uncovered call writing: The risk of selling an uncovered call is unlimited and may result in losses significantly greater than the premium
received.
Uncovered put writing: The risk of selling an uncovered put is significant and may result in losses significantly greater than the premium
received.
Call or put vertical spread purchasing (same expiration month for both options): The basic risk of effecting a long spread transaction is
limited to the premium paid when the position is established.
Call or put vertical spread writing/writing calls or puts (usually referred to as uncovered writing), combinations or straddles (same expiration
month for both options): The basic risk of effecting a short spread transaction is limited to the difference between the strike prices less the
amount received in premiums.
Call or put calendar spread purchasing (different expiration months and short must expire prior to the long): The basic risk of effecting a long
calendar spread transaction is limited to the premium paid when the position is established.
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