Did You Know? The Secret Behind Top Traders' Success in '09

Ever wondered what sets top traders apart, especially in years like 2009 when markets are anything but predictable? Well, it's not just about having a crystal ball or being lucky. It's about strategy, diversification, and a healthy dose of risk management.

Take Financial Commodity Investments' (FCI) Credit Premium Program (CPP), for instance. It was one of the top performers in 2009, returning a whopping 29.04%. But here's what makes it unique: it also made profits in 2008, a year that saw many other options writing programs struggle.

The Diversification Advantage

FCI President Craig Kendall, a certified public accountant and seasoned investor, attributes this success to diversification. Instead of focusing solely on equity indexes like most options writers, FCI trades energies, currencies, bonds, and grains – all major liquid markets. This approach allows them to find volatility opportunities across various commodities, making their trades less risky.

"With this strategy we are really a short volatility play," Kendall explains. "There are times when the volatility on the S&P doesn’t warrant doing credit premium selling because the risk/return just isn’t worth it. But by diversifying our research across different commodities, we find opportunities to make good trades that can be a lot less risky."

Managing Risk in Volatile Markets

But diversification isn't their only secret. FCI also places great emphasis on risk management. Each program has roughly $10 million under management, and they monitor two dozen markets instead of just one or two indexes. This allows them to be choosy about their trades.

"We really have to monitor a lot more markets," Kendall admits. "But if we monitor all these markets and take only the safest volatility trades, we should have better returns for our clients with reduced risk."

Both programs are discretionary, considering both technical and fundamental inputs. The Options Selling Strategy (OSS) sells mostly naked options two standard deviations out-of-the-money. The CPP gets in on credit spreads and is always hedged.

Navigating Uncommon Market Conditions

So, what does this mean for your portfolio? Well, if you're looking to replicate FCI's success, consider diversifying your investments across different commodities. This can help you capitalize on volatility opportunities and reduce risk.

However, remember that diversification doesn't eliminate risk entirely. It simply helps manage it. Therefore, it's crucial to monitor your markets closely and have a predefined stop loss strategy in place.

What Can We Learn from FCI?

FCI's success story teaches us two key lessons:

1. Diversification matters: Don't put all your eggs in one basket. Spreading your investments across different commodities can help you capitalize on various volatility opportunities. 2. Risk management is paramount: Always have a predefined stop loss strategy, and monitor your markets closely to ensure your trades remain safe.

Now, let's look at some specific assets. For companies like C (Coca-Cola), GS (Goldman Sachs), BAC (Bank of America), MS (Morgan Stanley), and DIA (Dow Jones Industrial Average ETF), diversifying investments could help mitigate risk while potentially boosting returns.