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I trade options and was curious about the Vest startup: https://www.vestfin.com/ https://www.vestfin.com/ I think how they manage their risk is buy buying a c

I trade options and was curious about the Vest startup: https://www.vestfin.com/ https://www.vestfin.com/ I think how they manage their risk is buy buying a covered call and put for their customers on the open market: e.g., To replicate their SPY hedging strategy by Jan 15th 2016 here: https://www.vestfin.com/build-strategy/?symbol=SPY&preown=false&quantity=100&leverage=1&expiry=2016-01-15&gains=235&protection_top=210&protection_bottom=178&physical=false https://www.vestfin.com/build-strategy/?symbol=SPY&preown=fa... SPY is trading at 209.93; "Select how much upside gain you are willing to cap at (235)", so sell a covered call at 235 that expires by 1/15/16; current options market: $0.04 credit "Select how much downside risk you are willing to lose to (178)", so buy a put at 178 that expires by 1/15/16; current options market: $2.02 debit Cost basis to implement via open market: $1.98/share Cost basis to implement via Vest: $5.11/share So their profit margin should be: $3.13/share or ~$300/option contract (account $13 for their commission and margin fees); now add their 0.5% management fee for the dollar value of this 100-lot SPY position (21504*0.005) or $107.52. So the total profit they make per 1 SPY option contract is: $407.52! And their active management involves only and only buying and selling these two option positions at the get-go! If so, this is a pretty good business to get into! Can someone else enlighten me if I did the math wrong here or I'm missing something here that I didn't account for their active management?

jackgavigan 11y ago
It's slightly more complex than that because they're "protecting" you between $178 and $210. If you scroll down and click the "Preview Your Strategy" button, it'll show you exactly what they're going to do. So, in your example, they would: Short SPY 2016-01-15 call option with strike price at $235.00 Long SPY 2016-01-15 call option with strike price at $210.00 Short SPY 2016-01-15 put option with strike price at $178.00 The net cost of that (including commissions) would be $516.24 They'd also retain cash of $21,000 If the price ended above $235, you would exercise your option to Buy @ $210 (using the $21k cash), but would be forced to Sell @ $235, so you'd end up making a profit of $25 per share (i.e. $25,000 in total). If the price ended below $178, you would be forced to Buy @ $178 (using $17,800 of your $21,000) and you would then sell at the market price, losing up to $178 per share. You'd also get back the unused $3,200 cash. If the price ended between $178 and $210, you wouldn't do anything, nobody would exercise the options you'd sold them and you'd get back $21,000 in cash. If the price ended between $210 and $235, you would exercise your option to Buy @ $210, and you would then sell at the market price, so you'd end up with somewhere between $21,000 and $25,000.
- noname123 11y ago
  Thanks jacksgavigan, I misread. Now I see the option positions that they're doing, I missed the fact that they are doing a bull-put spread and then a covered call. Looks like they only make money on asset management fees and also commission fees; not on the spread of the option positions.
  - jackgavigan 11y ago
    Don't forget the interest on the $21,000 (tiny though it may be at the moment).
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jackgavigan 11y ago

It's slightly more complex than that because they're "protecting" you between $178 and $210. If you scroll down and click the "Preview Your Strategy" button, it'll show you exactly what they're going to do. So, in your example, they would: Short SPY 2016-01-15 call option with strike price at $235.00 Long SPY 2016-01-15 call option with strike price at $210.00 Short SPY 2016-01-15 put option with strike price at $178.00 The net cost of that (including commissions) would be $516.24 They'd also retain cash of $21,000 If the price ended above $235, you would exercise your option to Buy @ $210 (using the $21k cash), but would be forced to Sell @ $235, so you'd end up making a profit of $25 per share (i.e. $25,000 in total). If the price ended below $178, you would be forced to Buy @ $178 (using $17,800 of your $21,000) and you would then sell at the market price, losing up to $178 per share. You'd also get back the unused $3,200 cash. If the price ended between $178 and $210, you wouldn't do anything, nobody would exercise the options you'd sold them and you'd get back $21,000 in cash. If the price ended between $210 and $235, you would exercise your option to Buy @ $210, and you would then sell at the market price, so you'd end up with somewhere between $21,000 and $25,000.

noname123 11y ago
Thanks jacksgavigan, I misread. Now I see the option positions that they're doing, I missed the fact that they are doing a bull-put spread and then a covered call. Looks like they only make money on asset management fees and also commission fees; not on the spread of the option positions.
- jackgavigan 11y ago
  Don't forget the interest on the $21,000 (tiny though it may be at the moment).

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