Absolute Returns in an

Uncommon Market

10-CINV-00063
 Program Overview
 The program consists of writing short (selling) call and put option positions with the goal of
profiting from time decay. The approach, in and of itself, is similar to the one used by
insurance companies across the globe. Just like an insurance company, you will have to pay
out from time to time. Remember,however, that insurance companies profit by collecting
many premiums, but only paying out on a few.

Option Selling Strategy

 Short term dated contracts with expiration between 15 to 180 days

 Utilizing 50 to 70% of total account margin requirements

 Use of Diversification (more than 10 markets)
 Money management

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 Selling an Option Contract
is Like Selling Insurance
 Insurance companies collect small,
certain amounts of money (premiums)
from policyholders who want to avoid
the possibility of a large, uncertain
financial loss
 If a customer pays $250 when buying
insurance, but does not have an
accident, the insurance company
keeps the $250 and there are no
payouts. ‘Statistically’, the insurance Note: Insurance
companies have probability on their Companies are likely to
side. have substantial funds to
sustain losses whereas a
 Selling options is similar to selling client may not be able to
insurance. sustain such losses
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 Selling an Option Contract
is Like Selling Insurance
 Insurance companies collect small,
certain amounts of money (premiums)
from policyholders who want to avoid
the possibility of a large, uncertain
financial loss
 If a customer pays $250 when buying
insurance, but does not have an
accident, the insurance company
keeps the $250 and there are no
payouts. ‘Statistically’, the insurance
companies have probability on their Note: Insurance
side. Companies are likely to
 Selling options is similar to selling have substantial funds to
insurance. sustain losses whereas a
client may not be able to
sustain such losses
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 It has often been said that selling options is similar to operating an insurance company. Buyers of car

insurance pay insurance premiums to an insurance company to insure their vehicles. They pay these

premiums month after month. In most cases, the driver never has an accident, and the insurance

company keeps the premiums as profit. If a driver does happen to have an accident, the insurance

company must pay up.

An insurance company tries to weed out drivers that it deems to be prone to accidents. Some of these

may get insured at higher premiums (to account for the higher risk the insurance company is taking on

them), and some may not get insured at all.

Our job as an option seller is to go through this exact same process. Just as most drivers do not have

accidents, most of your options will never go in the money. However, as in insurance, a few bad

accidents can be bad for the bottom line. An insurance company, therefore, tries to reduce the chances

that one of its drivers will have an accident by checking a number of factors such as driving record, age

of the driver, type of car, etc. As an option seller, you will go through this exact same process except

instead of drivers, you will be studying a market’s “driving record,” historical tendencies, current and

future fundamentals, etc. While an insurance company can in no way guarantee that the drivers it

selects will not have accidents, it certainly can help its business by selecting only drivers who have

what it considers a low chance of being in an accident. Thus it can lower its risk and increase its

profitability.
 Option Time Decay
Time Decay of an option begins to accelerate in the
last 30 days before expiry
Time Decay from Day 120 to Day 90 (Least Impact)

Time Decay from Day 90 to Day 60 (Slightly Greater)

Time Decay from Day 60 to Day 30

(Greater Still)

Option Time Decay from Under

Value 30 Days Prior to Expiry
(Most Rapid)

120 90 60 30 0
Days Days Days Days Days
Time Remaining Until Expiration Date
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 Portfolio Strategies
 Utilize hedge strategies to manage risk and minimize
losses
 Absolute Return Strategy – Allowing for potentially
positive returns irrespective of market direction
 Net premium collector on derivatives -
targeting consistent absolute returns

 Diversify with no investment tying up

more than 10% of the total invested
capital

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 Portfolio Strategies
Cont’d
 Only trade in liquid markets
 Target total invested capital requirements to be 10% of
total account balances
 Active risk management practices in place such that no
investment incurs a big drawdown.

 Capitalizing with market volatility

Strategy is targeted to hit consistent

singles every month and never swing
for the home run!

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 Portfolio Strategies Cont’d

This trading strategy that does not attempt to forecast 100% the market direction, even if we are wrong

in the direction, since we sell Deep-out-of the-Money options, the market need to make a major move

against our position in order for us to lose on the trade, and in this case we have to ways to protect ourself,

buying the stock, or roll the contract.

Information used to influence the investing decisions includes:

· Interest rate and annual volatility

· Probability of an option being at a specific price (touching), being above or below it.

· The historical pricing patterns of the pair

· The pair’s price movement

· Money management
 What is Absolute Return
Investing?
 Potential to make money in all market environments.

 Potential to make money regardless of market direction.

 Potential to make money while managing risk.

 Potential opportunity to have positive returns as the equity

markets or underlying commodity markets have negative
returns.

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 CFMI (Option Selling Strategy)

 Execute the sale of short term date, far out of the

money derivative contracts

 Expiration is between 25 to 60 days

 Target a win rate of 90% on all contracts written

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 Summary of Terms

 Incentive Fee 20%

 Management Fee 2%
 Short 90-Day Lockup Term

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 Investment Strategies Used
Interactive Financial
executes its investment strategy only on liquid Stocks and ETF

Selling Credit Spreads

Selling Covered Calls on Stocks

Selling uncovered puts for the opportunity to buy undervalue

stocks.

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 What Makes Our Strategy Unique
 Multi market approach to option selling

 Execute only in liquid commodity and equity index markets

 Statistical advantage that most contracts will be profitable

(over 90%)

 Advantageous in that the underlying commodity price can

move against us and the derivative contract can still be
profitable

 Diversification within financial instruments to minimize risk

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 Risk Management
Solid practices with clients’ needs in mind
 Pro-active monitoring and management of investments in
relation to risk, return, capital requirements, and market
directions and policies in place to adjust as needed
 Conservative money exposure guidelines in place
 Management Review
 Analyze Liquidity and Leverage
 Analyze Volatility
 Consider and Account for Drawdown
Risk Management

Factors
 Fund-level Review
Practices

 Review Fund Performance on a Daily

Basis
 Track Correlation Regularly
 Measure and Minimize Exposure
 Analyze Scenarios on a Monthly Basis
 Fund-level Controls
 Performed Only As Needed
 Focused on Risk-reduction and Cost-
effectiveness

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 Reliability &
Responsiveness
Respecting our clients’ business

 Highly seasoned, experienced, competent and professional staff proactively managing the day
to day investments

 Timely, accurate, and thorough reporting to investors.

 We have our own money invested in the same managed trading program as our clients, proving
we believe in it and risk our money alongside yours.

 We are an alternative investment management firm seeking to make money for our clients
regardless of what the stock, bond, and real estate markets are doing.

 We will not be able to access your funds. We only have the ability to trade within your account.

 Our Broker is Member of FINRA, SIPC, AMEX, NOM, CBOE, ISE, ArcaEX, BOX, PHLX, and
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