We invest in leading listed companies & specialise in the use of options to manage client funds. At any point in time, our funds carry less risk than mainstream funds.
The degree of participation of our portfolio to the upside and downside will reflect our worldview, options pricing, and volatility expectations.
Our funds harness dividends, franking credits, trading gains, and option premiums for income. We use a range of strategies and have had success in delivering a consistent risk-reward profile, partially insuring against market falls.
Consider the investment process:
We are interested in discovering just what is driving performance at the moment.
How high are expectations for market growth, how high the demand for protection.
What is the outlook for sector volatility.
Thus, we monitor momentum and volatility conditions in North America, Europe and Asia-Pacific.
We set portfolio strategy in response to market conditions.
We operate, in general, at about 65% risk relative to global markets, and about 70% for Australia.
This number reflects longer-term modelling around risk to reward.
The participation of our portfolio to either the upside or downside will be a reflection of our current strategy.
Owning call & put options would suggest that we find them to be well-priced relative to expected market volatility.
When we anticipate increased volatility for a period, we will own more options, to help protect us.
Selling options brings very different risks. In order to generate option premium income, you need to be at risk to a downward move in the share price. No free lunch. To help decision-making we screen share prices for volatility, momentum and trend indicators. We consider mean reversion (trading patterns), and market confidence in company valuations.
To distill the opportunities, we use certain filters and models.
Different models are used for different strategies.
We screen for stocks using models in four main categories:
Typically our global portfolio has about 70 share and option positions.
International portfolios are currency hedged and denominated in Australian dollars.
How we use options to to get better returns.
Option prices reflect levels of volatility in the market place. The option marketplace allows us to use options as well as, or instead of, shares – to build a lower risk portfolio. We access various strategies:
- Long physical shares – familiar upside and downside risk
- Buying call options – allows us to keep funds at bank
- Buying put options – provides protection
- Volatility trading – aim to offset market falls, increased market volatility
- Selling options – income generating
- Volatility conditions ebb and flow with the degree of confidence in the market
- Lower volatility leads to cheaper option prices, and vice versa
- We may use call options to maintain our participation to bullish moves.
- We target both income opportunities (by option premium selling) and protection opportunities (using downside protection strategies).
- By using options we are less reliant on bull markets, forecasting, or luck.
In short, our approach means that we are better able to control fund outcomes.
Denning Pryce offers investment products that use shares, options and futures to target specific investment returns and market risks.