Disclaimer
• This is NOT an offer to sell or a solicitation to buy any security.
• Offering will be by Private Placement Memorandum (PPM) ONLY.
• This is only intended as a basic primer on the strategy used in MNII
• All investors MUST read the PPM and understand the risks before investing.
Risk Factors
• Market risk
• Liquidity risk
• Leverage risk• Security specific risk
• Timing risk
• Volatility risk
• Interest rate risk
Market Neutral
• Not Dependent on Market direction
• Equally weighted to up and down moves• Diversified by industry (Sectors)
• Low expected correlation to Stock indexes
• Low expected correlation to Bonds
• Low expected correlation to Real Estate
Income Investments
• This Investment is designed to produce a regular (recurring) Stream of Income.
• Income can be re-invested or distributed.
• Short term gains are generally taxed as ordinary income.
Equity tools
• Stocks (Equities)
• Contracts on underlying equity securities
“Puts” (gain value when stocks decline)
“Calls” (gain value when stocks advance)
• Spreads (combine 2 contracts to manage risk, reward, time of exposure, or loss)
Time frame
• The Company intends to transact a series of short term investments, generally less than one month in duration.
• Investors will commit to a six month period of illiquidity; after 180 days investors may take all or a part of their investment out.
• Investors also have the option of removing monthly gains, if any, every quarter.
Stock Selection
• The greatest time requirement is allocated to the selection of individual securities, and sometimes indexes.
• Securities selected are screened against a large
number of qualities and variables. (39 currently)
• Selection is weighted for both risk and return. Lower risk is favored over return.
Selection
• Stocks are routinely screened with computer selection programs
• Technical and fundamental scores are considered and evaluated
• Both commercial and custom designed screening programs are used
• Diversification of sectors is maintained • Exposure of capital in any one stock is
usually limited to a maximum of 10%
Security Selection
• When a target security is identified, the following additional checks are performed:
• Option liquidity• Option open interest
• Earnings release dates
• Premium levels
• Ability to get both sides ‘in the money’
Example of a long transaction
• Data as of close 4/26/07
• Apple Computer currently trading at 98.8• Apple May calls expire in 22 days
• May 90 call ask price 9.40 (8.8 value)» (.60 premium)
• May 95 call bid price 4.90 (3.8 value)» (1.10 premium)
Long example continued..
• Remember Apple is at 98.8 in our example
• Net cost is 4.50 (9.40 – 4.90)
• Spread Value if stock is unchanged= 5.00
Long example continued..
• Remember Apple is at 98.8 in our example
• Net cost is 4.50 (9.40 – 4.90)
• Spread Value if stock is unchanged = 5.00
• Spread Value if stock is increased = 5.00
Long example continued..
• Remember Apple is at 98.8 in our example
• Net cost is 4.50 (9.40 – 4.90)
• Spread Value if stock is unchanged = 5.00
• Spread Value if stock is increased = 5.00• Spread Value if stock drops 3.00 = 5.00
Long example continued..
• Remember Apple is at 98.8 in our example
• Net cost is 4.50 (9.40 – 4.90)• Value if stock is unchanged = 5.00• Value if stock is increased = 5.00• Value if stock decreases 3.00 = 5.00• Value if stock decreases 5.00 = 3.80
Long example conclusion
• If we paid 4.50 for this spread,
• And it is worth 5.00 in 22 days
• We would make 11% on our investment.• Commissions will reduce the return. (3%)
• Overhead also reduces the return (.008%)
• Net in our example is 7.992% in 22 days
Example of a short transaction
Data as of close 4/26/2007
• Apple is currently trading at 98.80• Apple May Puts expire in 22 days
• May 105 Put price is 6.50 (6.20 Value)» ( .30 premium)
• May 100 Put price is 2.70 (1.20 Value)» ( 1.50 premium)
Short example continued
• Remember that Apple is at 98.80
• Net cost is 3.80 (6.50- 2.70)• Value if stock is unchanged = 5.00
• Value if stock is decreased = 5.00
• Value if stock is increased 1.00 = 5.00
• Value if stock is increased 3.00 = 3.20
Short example conclusion
• If we paid 3.80 for this spread
• And it is worth 5.00 in 22 days
• We would make 31% on our investment• Commissions will reduce the return <3%>
• Overhead also reduces the return<.008%>
• Net in our example is 27.992% in 22 days
The Heart of the Matter
• Speculators are eager to pay a premium to increase the amount of leverage used on an investment position.
• The premiums they pay decline most rapidly in the last month of a contract’s life.
• By selling contracts to speculators, investors can capture a premium with an attractive return in a short period of time.
MNII Investor Advantage
• Stocks go up• Stocks go down• Stocks stand still
• But time only goes forward!
• The passage of time benefits the seller of option premiums.
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Typical Positions
• Long AAPL spread• Long TSO spread• Long POT spread
• Long HD spread
• 2 to 4 Straddles or:• 2 to 4 Condors
• Short HOV spread• Short TIE spread• Short ZION spread
• Short IGT spread• And possibly…
• Profit when stock moves big / profit when stock stays still
Expenses
• NO Selling Cost
• Less than 1% overhead fee (to cover mailing and accounting costs)
• Commissions (depending on activity, but about 1/40th of big firms cost!)
• “Free ride” on first 5% of profit
• Participation at 20% of gains over first 5%
Diversification
• Rebalancing
• Allocation
• Non Correlation• Compounding (Monthly!)
• Market Neutral position
• Active Management
• Hedge Fund Agility
Safeguards
• Segregated Bank Account for deposits
• Independent custodian for securities
• Only one paying client for Manager (Peloton, LLC) – no conflict of interest
• CPA firm (Shafer Group) prepares monthly investor reports and issues all distributions
READY?
• $100,000 Minimum Investment
• Qualified Investors required
• Six month commitment• Private Placement Agreement
• Only 99 investors
• No published track record…..yet!
• Target of 5%............per month.
Legal Note:
Past performance is not indicative of future results and
all investments have risks. Read the PPM for a more complete
listing of risks and considerations.
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