Cervino Capital Management LLC

Diversified Options Strategy 2X (D2X)

Cervino Capital Management’s DIVERSIFIED OPTIONS STRATEGY 2X is an absolute return program which involves the same trading strategies as the Diversified Options Strategy 1X program but will trade twice as many contracts as the 1X program for the same nominal account size. Accordingly, the additional leverage of the 2X program is expected to result in increased account volatility, and therefore an increased potential for higher returns as well as an increased potential for larger drawdowns. The objective is to generate consistent monthly returns averaging between 100bps and 500bps for an annualized target of 20% to 30%. The program trades options on a diversified portfolio of financial futures contracts including equity indices, fixed income, currencies, and precious metals. Opportunity and risk exposure is further diversified through use of different types of complex option positions such as debit spreads, credit spreads, condors, ratio spreads, strangles and calendar spreads as well as naked puts and calls. The variety of positions contributes to the creation of multifaceted and versatile strategies tailored to market conditions and trading outlook. Trading decisions are based on a blended analytical process combining quantitative analysis, fundamental studies, and technical and sentiment indicators. The intent is to identify and arbitrage price discrepancies that reflect under- and over-valuations as well as direction/trend bias, and to produce a replicable trade execution process resulting in positions with statistically high probabilities of positive outcomes. Our risk management philosophy recognizes that investment performance is a function of risk taken, but also that the complexity of human behavior can never be fully modeled. And while mathematical techniques reveal important dynamics within the markets, circular relationships between cause and effect relegate quant models to just an abstraction of reality... Expecting these models to be exactly right is unreasonable. Rather, a discretionary common sense approach is needed—one which balances the quantitative with the qualitative in order to manage the cycles of volatility. Risk control is achieved through a variety of means which in most market conditions should minimize drawdowns. The first is portfolio construction and diversification; second is controlling leverage through position sizing adjusted according to account size, volatility and risk-reward analysis; third is stops based on money management rules; and fourth is manager discretion in which trade exit decisions are implemented due to changes in market analysis.