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The Keystone Strategy

Granite's Keystone Strategy is an advanced investment product intended for sophisticated investors who seek returns greater than those expected from more traditional investment products.

The foundation of the strategy is based on the teachings and techniques found within the Trading Dominion community, established by Ron Bertino. www.tradingdominion.com

 

The objective of the Keystone Strategy is to sell out-of-the-money put option spreads and/or combination positions on equity indexes, such as the S&P 500, and capitalize on the time decay of the value of the options sold in order to produce reasonably consistent monthly returns.

 

The strategy leverages the use of portfolio margin to implement income trades that are very resilient against strong down moves in the market, yet still produce a very attractive return on capital (for a more detailed explanation about portfolio margin, please click here).  

 

Corresponding complementary hedge positions are continuously established and adjusted to mitigate the effects of extreme and violent downside movements in the market.  

The strategy may also invest in Equity, Bond, and/or Treasury positions to utilize unused/available cash within the account.

 

The Keystone Strategy is very actively managed (continuously monitored and traded during, and if necessary before and/or after, normal market hours). Trading for purposes of managing risk, adding new positions and harvesting mature positions takes place daily. Risk management is of paramount importance and transpires continuously via sophisticated position risk modeling and scenario analysis.

Keystone Details

A More In Depth View

The Keystone Strategy is comprised of three unique strategies that were designed and developed within the Trading Dominion community. 

Each strategy is designed to capitalize on different parts of the option chain/skew curve.

 

Strategy #1, what we call the 488 trade, is essentially a Put Broken Wing Butterfly, initiated between 150-250 days to expiration and situated approximately one standard deviation out of the money. Additional long puts are also introduced to the lower leg of the butterfly to hedge against tail risk and help mitigate the potential impact of a "Black Swan" event.

 

 

Strategy #2, referred to as the 139 trade, closely resembles Strategy #1, with the exception of being positioned closer to the money and targeting a different area of the skew curve with its hedging approach.

Strategy #3, named the CWB trade, is an at-the-money butterfly, also intended to provide diversification by targeting a distinct area of the skew curve. 

All trades are initiated at roughly flat delta, positive theta, and negative vega. However, we adhere to a very precise set of entry conditions that must be satisfied before we even contemplate initiating a potential new position. Some of these entry condition filters encompass aspects such as position price, skew, concavity, and Greek ratios, among others. 

Additionally, we integrate two supplementary hedging strategies to mitigate the risk from a "Black Swan" event. The first, Granite's LP Factory, operates as an ongoing strategy, while the second, Granite's LPTA strategy, is triggered based on technical analysis. 

Monitoring & Adjustments

After a position is initiated, it is extensively monitored in a multitude of ways. We have developed an all-encompassing monitoring system that makes sure the position stays within our proprietary guidelines. Some of the key metrics being continually monitored and maintained are position deltas, risk/reward margin ratios, theta to margin ratios, position vega exposure, tail risk, and overall margin exposure. We also very closely monitor how parallel volatility, skew slope, and concavity movements are affecting the positions. If any positions move outside of the established guidelines, we are immediately notified and make the appropriate adjustments. The end result is that positions ALWAYS stay well balanced, durable, and efficient.

 

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When it does come time to adjust, standard adjustments include Put Credit Spreads, Put Debit Spreads, delta hedging with the underlying, and/or rolling the position down (or up), just to name a few.

 

 

On a daily basis we continually monitor the market to search for opportunistic times to initiate new positions. Our goal is to enter new, incremental positions once a week on average. Since a typical trade’s life cycle is about 60-100 days, this means we will have multiple individual trades open at any given time. We call this “Campaign Trading”, meaning we have a continual campaign of new and old trades all working together in a systematic manner. This campaign method helps diversify the risk aspects of any one individual trade amongst the entire group and allows the “older” more established trades to help hedge the “younger” more exposed trades. It’s similar to the concept of “dollar cost averaging” … we’re spreading out “risk” in an organized and orderly manner.

 

 

We also have a comprehensive risk management plan in place to help mitigate any unforeseen market events. As we mentioned earlier, we purchase additional Puts on the lower leg of our broken wing butterfly as a means of proactive Black Swan hedging. We also employ a very well-defined downside adjustment program consisting of Long Puts, Put Debit Spreads, and Put Back Ratios as well as defined stop loss levels to aggressively limit downside risk potential.

Performance Targets

Our annual performance target for the Keystone Strategy is 20% (net of fees).

It should also be noted that due to the nature of options in general, the performance of the system can and will be volatile at times, so it is crucial that all investors have the ability and tolerance to withstand this volatility. Historical back testing has shown the potential for 20%+ drawdowns on rare occasions, and 10%+ drawdowns on more frequent occasions. This level of volatility must be well understood and acceptable for any investor who chooses to engage in this program.

For additional information as well as live, up-to-date, real-life Keystone performance results, please see our

Performance Info Page  or  Contact Us.

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