CAZ Covered Combo Fund

Type: Liquid Fund
Minimum Investment: $500,000
Strategy: Equity Alternative

Why This Fund?

Purpose

The CAZ Covered Combo Fund (“CCO”) provides direct exposure to our major themes via positions in the liquid markets.

For the first time since the Global Financial Crisis, markets dislocated in a significant way in 2020 and volatility has remained elevated. We believe investing in major themes that have significant tailwinds, while profiting from the spike in volatility, will provide superior returns when compared to plan vanilla equity investments. CCO is designed to outperform the S&P 500 on a risk-adjusted basis. The Fund’s methodology utilizes long equity positions that are based on themes that we identify, while applying our 30+ years of options experience overlaying positions with Covered Combos. Additional highlights include:

Target 10% annual cash flow yield from option premiums and dividends
10-20 thematic positions diversified across theme, sector, capitalization and geography
Opportunity to acquire very attractive assets at material discounts to early 2020 prices

Purpose & Objectives

The CAZ Covered Combo Fund seeks to outperform the S&P 500 on a risk-adjusted basis by utilizing long equity positions that are based on themes that we identify, while utilizing our 30+ years of options experience overlaying positions with Covered Combos
The Fund will aims generate an annual cash flow yield from option premiums and dividends of at least 10%
Investors may enter and redeem with weekly liquidity
The Fund typically consists of 10-20 thematic positions, diversified across theme, sector, capitalization and geography
Investors have access to full transparency of all portfolio positions

Why Sell Options?

For the first time since the Global Financial Crisis, volatility has skyrocketed:

This elevated volatility creates the opportunity to collect very high option premiums by selling options
It is estimated more than 75% of all options held to expiration end up expiring worthless
Put option premiums are very much like insurance premiums, whereby the buyer attempts to protect him or herself from a potential adverse event and is fully expecting to lose money on the cost of that insurance (homes, cars, etc.)
Call option premiums are very much like gambling, where the buyer typically is speculating on a specific outcome
Investors can earn income, and protect their downside, by collecting option premiums from speculators similar to the house vs. the gambler, and from those purchasing portfolio insurance

Covered Combos

According to a frequently cited research publication*, Covered Combos typically produce higher average returns when compared to simple stock ownership, in 90% of tested results. The advantages of the Covered Combo are numerous, but the primary reasons they are utilized are:

The receipt of two different option premiums, both of which benefit from the natural time decay of options
Immediate receipt of the premiums reduces the cost of the position, leading to higher percentage returns based on no change in the underlying security
The proceeds from the option premiums create significantly lower break-evens for the position, compared to simple ownership
If the investor is required to purchase more of the security as a result of the Put being exercised they are buying more of a security they already like, at a material discount to their original purchase
The outperformance band of a Covered Combo position can be extremely large, providing for a much higher probability of outperformance
The empirical data clearly shows the propensity of Covered Combos to outperform simple security ownership
This is logical, because of the immediate advantage that is received from the sale of multiple options that will lose 100% of their time value when they reach expiration

*Source: The Performance of Options-Based Investment Strategies: Evidence for Individual Stocks During 2003─2013 (Dr. Michael L. Hemler, Notre Dame and Dr. Thomas W. Miller, Jr., Mississippi State)

Sample Position

For a Covered Combo, the investor owns the security and sells BOTH a Call and a Put against that position, which obliges the investor to sell the security at a set price and to be willing to buy more of the security at a set price, both for a specific period of time.

This illustration compares the results of a simple purchase of JPM at $85.08 to a position created by the investor selling BOTH the JPM Jan 70 Put for $12.96* and the JPM Jan 100 Call for $9.99
The dotted blue line illustrates the profit/loss of simple stock ownership
The black line illustrates the profit/loss curve of the covered combo
The green shaded area represents prices at which the covered combo outperforms simple stock ownership

Presentation

Download Presentation

Terms

OBJECTIVE: Capital appreciation with significant cash flow
MINIMUM INVESTMENT: $500,000¹ (Qualified money accepted)
SUBSCRIPTIONS: Accepted weekly from Accredited Investors
MANAGEMENT FEE: 0.75%^1,2
INCENTIVE FEE: 0%
REDEMPTIONS: Weekly with 3 business days notice
K-1 TIMING: Expected late spring
ATTORNEY: Jackson Walker LLP
AUDITOR: Deloitte & Touche LLP
ADMINISTRATOR: PartnersAdmin LLC

¹Smaller amounts may be accepted at a different fee structure.

²Breakpoints may be available for larger investments.

¹ Smaller amounts may be accepted.
² Breakpoints may be available for larger investments.