UZZ Fund

The Safer Approach to Consistently Higher Returns

Phone:  919.454.1080

Email:   bob@transform-services.com

Methodology

 

Background

UZZ Fund uses a proprietary algorithmic approach to creating higher than average investor returns combined with a level of safety that may be surprising.  Understanding how the UZZ Fund does this, and why it is different, requires us first to see how traditional approaches work.

 

Most funds rely on equity investment and trading, supplemented by appropriate options trades, to support their approach.  A number of assumptions are made to enable this traditional approach:

1. Long term value creation is a matter of long periods of time invested in stocks and funds of better than average value and/or growth rates.

2. Appropriate allocation methods among sectors or types of funds reduces risk and allows for the best overall performance.

3. Short term trading cannot work in the long run because, the thinking goes, it requires predicting the large moves that are so important to long term performance (for example, only twenty days of a typical year account for nearly all gains for that year).

 

Ironically, it is because the UZZ Fund believes that markets are indeed unpredictable and that timing for equity gains is problematic that we believe our approach is superior.  There is very little long term correlation between individual company performance and that company's stock performance.  Most measures of such things asymptotically approach the long term S&P 500 average of 8% annual.  This is the reason that index funds are so popular today.  They deliver the average of the market and most managed funds deliver less.

 

We trade credit spreads because statistically they have a higher likelihood of success (66%) versus regular equity trades (33%) under short to medium term conditions.  Credit Spreads rely on option premium - which we know declines to 0 over an options life - to create income in each period knowing the conditions that must be met to do so. We limit the number of vehicles we use because knowledge of behavior and risks counts more than knowledge of the market conditions or business environment (especially in an age of political spin and outrage).  We limit our exposure both in terms of allocation of cash and in terms of time allocated to trades in order to gain when the getting is good and being in cash when it is not.

 

When Do We Trade?

In comparison to other funds, UZZ Fund has a very defined trading window and trading design.  We only open positions between 3:30 and 4 PM on applicable Tuesdays.  For a trade to be opened, it must meet all of a set of criteria including:

  • The pattern chart must be clearly and unambiguously BULLISH or BEARISH
  • A credit spread trade of at least .05 value must be available at 80% OTM or better.
  • No more than four trades can be opened.

 

The first chart is of QQQ on 9/3 (at the far right the chart says it is 9/2 which is wrong) and what we want is for each of the three sections of the chart to line up in terms of BULLISH or BEARISH indication among them and within each section.  Anything else - and it is no trade.  There are a few reasons why QQQ was not traded on 9/3:

  • The price has not declined below twenty day moving average to be BEARISH (even though the downward pattern is there and the risk ratio is BEARISH)
  • The MACD shows positive momentum that contradicts a BEARISH pattern.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On 10/1 though, IWM showed a consistent BEARISH pattern as on this chart.  All parts of each of the three sections are aligned to a BEARISH direction and thus all three sections agree.  So we can look at IWM and if it has a trade of .05 or better with at least 80% OTM then the trade would be on.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What Do We Trade?

We trade weekly credit spread options in five popular exchange traded funds (ETF): QQQ, SPY, IWM, TLT, VXX.  We have long experience with these ETF's both in swing trading as well as in option trades in general - but especially as credit spread trades.  A credit spread is merely selling a higher priced option while also buying a lower priced option - the difference is the premium and that is how we make profits in the UZZ Fund.  Typically, nine out ten such trades we do retain full value.

 

How Do We Protect Our Capital?

In any trading system we need to protect our capital by insuring that no matter what happens or how sure we are of future events we can preserve the capital entrusted to us.  We do this through the nature of credit spreads, capital allocations, and the use of stops on open spreads.

 

Credit spreads provide their trade benefit up front at trade open.  Thus, we gain the capital necessary to close them if something should happen that alters their trading direction.   It also helps that we only have trades open three days at the maximum of premium decline of these spreads.

 

At no time does the UZZ Fund allocate more than 50% of available capital to trades.  In fact, we can only have four trades at maximum open (at 12.5% allocation each) and we usually have far less.  In addition, we use time allocation in that we generally are in cash for at least 70% of the days of the year.  All of these efforts are to be ultra safe and to focus on gains that can be realized only in the time frames that they are available.

 

The final measure of safety is the use of stops to protect open spread positions.  If the market in any of these positions reverses to the extent that the trade no longer corresponds to the conditions in which it was opened, we close it.   Generally, we usually make a small profit in any case but we can also have small losses in some cases.   All of our capital preservation efforts result in safer fund operations with higher gains.

 

Conclusion

The UZZ Fund utilizes some unique approaches to insure higher returns with preservation of capital.  For the full story of UZZ Fund operations, minimum investments, benefits and risks, please request a prospectus.

 

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