Options writing is viewed as one of the more risky trading strategies, but Max Ansbacher has found a way to survive and thrive in the options niche for more than 39 years — 19 of those as principal at Ansbacher Investment Management (AIM), where his strategy has produced a compound annual return of 11.52% since 1996 and is up 22.24% year-to-date through July.
AIM’s fund is a derivatives strategy that takes advantage of mispricing in the options market where Ansbacher writes options that trade at prices above their theoretical value. He describes the fund as partially hedged (but not naked) options writing.
Ansbacher says risk management is the most important aspect of options writing.
“Anyone can sell a put, and if the market remains calm it seems like an easy way to make money,” Ansbacher says. “But once the market starts going down, a lot of neophytes are amazed by how quickly option prices can turn against them.”
His risk management tools include strike selection, covered strategies and hard stops. He writes puts on the S&P 500 so they don’t have a concentration in high beta, highly volatile stocks. “We have stop loss orders on every option, which automatically takes us out of the market when prices are moving against us,” he says. “We have a partial hedge, which automatically makes money for us as we lose on the options.”
To stay successful as an options writer, you also have to be able to evolve.
“I’ve been developing this strategy since my early days at Bear Stearns when I wrote the first book on exchange traded options, ‘The New Options Market,’” Ansbacher says. “I eventually settled on writing options on the S&P 500 because of the diversification that comes with that index. Some people have accused me of not being diversified. I ask them how many stocks they think I should be writing on. They say, ‘Well, at least 30 or 40.’ I tell them, ‘That’s too few, how about 500?!’”
He says the largest evolution of the strategy over the years has been his hedging component. Prior to 2007, the strategy was unhedged. Since then he has been constantly tinkering with the correct ratio.
Besides an evolving strategy, you also have to be able to keep up with a changing options writing space. “While it is basically the same as it was 20 years ago, the market makers have improved and there is far more liquidity —both of those are a plus for options writers,” Ansbacher says. “Many options writers have come and gone over the years for various reasons, but the fundamentals of options trading really haven’t changed much. A lot of options writers who never expected the market to fall as far as it did were wiped out in 2008. That’s why, when you look at the records of many options funds, you’ll find that they start in 2009, which one might say is quite fortuitous for them.”
Speaking of 2008, the fund had its worst month that year. “One of the most important reasons for our success is that we stick with our strategy and aren’t constantly adjusting it based on daily conditions,” he says. Even in 2008 — our worst year by far — we were in line with the S&P 500 for losses. While it seemed disastrous at the time, in retrospect we’re very proud of that fact,” he says.
The strategy balances risk management with opportunity. “In February 2015 we had our best monthly return in over a decade at 9.22%. We had a large, unrealized loss coming in from puts we had written in January [that turned into a winner]. The beauty of our strategy is that it has the ability to perform well in a variety of market conditions,” he says. “Also, the market conditions were absolutely perfect for our strategy, moving up in a very calm and steady trend. While the market is basically flat on the year, we are up 24.24% right now.”
During his 20 years at Bear Stearns, Ansbacher, a graduate of the University of Vermont and Yale Law School, developed trading skills. “The most important thing I learned was to never try to predict what the market was going to do, particularly on a short-term basis,” he says.
“In our strategy, we only have to predict a range in which the market will move — not whether it will go up or down. The second most important thing I learned was to not listen to anybody else’s predictions. As smart as they are and as persuasive as they may sound, they don’t know any more than anybody else. They will always tell you when they’ve been right, and never mention when they’ve been wrong.”