Basis of Hedge Fund

Presented by Akin Okupe, M.B.A.P.E

General Manager, East Palo Alto
Sanitary District
East Palo Alto CA USA
June 26 2021.
 Table of Content
• Introduction
• What is Hedge Fund
• Classification of hedge fund
• Equity Hedge Fund
• Buying a call option
• Buying a put option
• Writing a call option
• Writing a put option
 Table of Content
• Bull Call
• Bear Put
• Long Straddle
• Short Strangle
• Live demo and questions
 Introduction
• Bachelors of Science in Civil Engineering,
University of Ibadan Nigeria, 1991
• Master of Business Administration (Finance),
University of Capetown, Capetown South Africa,
2001.
• Registered Professional Engineer, California, USA.
• General Manager East Palo Alto Sanitary District,
East Palo Alto California, 2017-Present
 Introduction
• Research Senior Civil Engineer (Applied
Research, City of Sacramento California, 2013-
2017
• Senior Civil Engineer Drinking Water Program
Manager City of Woodland California 2007-
2013
• Associate Civil Engineer El Dorado Irriggation
District 2002-2007
 Introduction
• Design Civil Engineer Jakoet Consulting Civil
Engineers Capetown South Africa 1997-1999
• Design Civil Engineer, Orrie Welby Solomon
Consulting Engineers 1996-1997
• Junior Civil/Associate Engineer Yethu
Consortium, Capetwon South Africa, 1992-
1996.
 Hedge fund
• An investment pool that is privately organized
• Offers performance based fees
• Can apply leverage
• Invest in private securities and real assets
• Actively trade derivative instruments
• Established short and long positions
• Generally holds concentrated positions
 Classification of Hedge Funds
• Macro and Managed Futures
• Event driven
• Relative value
• Equity
• Funds of funds
 Classification of Hedge Funds
• Macro futures invest in futures markets across
the globe
• Event driven invest in mergers and acquisition
and distressed equity
• Relative value invest in volatility, convertible
and fixed income arbitrage
• Equity driven invest in long/short positions
• Funds of funds invest in diversify hedge funds
 Equity Hedge Fund
• Taking long and short position in equity using
four basic derivative option strategies that
includes;
– Buying a call
– Buying a put
– Writing a call
– Writing a put
 What is an option
• An option is a contract which conveys its
owner, the holder, the right, but not the
obligation, to buy or sell an underlying asset
or instrument at a specified strike price prior
to or on a specified date.
• Example- XYZ JULY 7,2020, 70 CALL AT $3.20
 Buying a call
• Gives the owner the right to purchase the
underlying stock at the strike price
• Belief that the stock will rise
• Risk limited to premium paid
• Unlimited maximum reward
 Buying a put
• Gives the owner the right to sell the
underlying stock at the strike price
• Belief that the stock will fall
• Risk limited to premium paid
• Unlimited maximum reward
 Writing a call
• Belief that stock price will fall
• Maximum reward limited to premium
received
• Risk potentially unlimited
• Can be combined with other positions to limit
risk
 Writing a put
• Belief that the stock price will rise
• Risk unlimited
• Maximum reward limited to the premium
received
• Can be combined with other positions to limit
risk
 Bull Spread
• Bull Spread: Buy lower and sell the same number
of higher prices
– AB is trading at $26 on June 1 2020
– Buy June 7,,2020 26 strike call for $1.40
– Sell une 7, 2020 $31 strike price at $0.25
– Net debit $1.40-$0.25=$1.15
– Maximum risk $1.15
– Maximum reward $5-$1.15=$3.85
– Break even point=lower strike price + net debit
– $26+$1.15=$27.15
– Max ROI= 334%
 Bear Put
• Sell lower strike puts
• Buy the same number of higher strike puts
• ABCD is trading at $26 on June 1, 2020
• Sell the June 7, 2020 20 strike put for $0.35
• Buy June 7, 2020 25 strike price at $1.80
• Net debit $1.45
• Maximum risk $1.45
• Maximum reward=$3.55
 Bear Put
• Break even point $23.55
• Max ROI=244.83%
 Straddle
• Buy at the money call
• Buy at the money put
• XYZ is trading at $25.37 on June 1, 2020
• Buy June 7, 25 strike price call for $1.70
• Buy June 7, 25 strike price put at $2.40
• Net Debit= $4.10
• Maximum risk=$4.10
• Break even up = $25+$4.10
 Straddle
• Break even down= $25-$4.10=20.90
• Maximum reward, uncapped
 Short Strangle
• Sell out of the money call and put
• XYZ is trading at $25.37 on une 1, 2020
• Sell June 7, 2020 $22.50 strike put for $0.35
• Sell June 7, 2020 $27.50 strike call for $0.65
• Net credit 0.35+0.65=$1.00
• Maximum risk uncapped
• Maximum reward $1.00
• Break even up=$27.5+$1= $28.5
 Short Strangle
• Breakeven down-$22.50-$1= $21.50
Live Demo (Paper Trading)
Questions and Demo

For additional questions contact;

Boidun Jaiyesimi at
biodun.jaiyesimi@thebromwellgroup.com
Akin Okupe at Akin Okupe78@yahoo.com