I created the Σ1 Fund for several reasons.

1. A proprietary fund in which to invest some of my LLC’s assets.
2. A real-world investment vehicle in which to test, refine, and showcase  investing and trading strategies.
3. A hedge fund where my LLC can also make revenue from fees. (Fees as low as reasonably possible.)
4. A fund in which to directly invest some of my personal assets.
5. A fund were I can invest some of my retirement assets (e.g. 401K).

As of today I have only achieved goal #1.  I am making progress on goal #2.  If all goes well, the Σ1 Fund will be making progress towards goal #3 in the coming months.

I am happy to say that I trade modest quantities of stock (100-500 shares) for about the price of a candy bar.  Σ1′s stock and ETF trading costs are very low,  averaging about  3-4 basis points (0.03% to 0.04%) for a round trip on an typical equity position.  So far I often get the midprice or better on equity trades so the spread is also quite inexpensive.

Σ1 option trades are similarly inexpensive in absolute terms, but the spreads are wider and the dollar amount bought or sold is much lower.  Typical Σ1 option trade prices, currently, range from $300 to $1000 per trade.  The exchange fee the Σ1 Fund pays is thus as high as 35 basis points… not cheap.  Typical is probably closer to 20 basis points… still significant.  About half of  Σ1 Fund’s call writes expire out of the money, so I’d estimate the round-trip trading costs at about 30-35 BP.  In terms of the option price, this is a bit pricey. In terms of the overall portfolio it is more manageable.

It is not the direct trading costs for options, but the spreads that have my attention lately. It is common to see spreads of 2.5% on the ETF options that  Σ1 trades.  Assuming that the unweighted midprice (NBBO bid+ask, div 2) is the fair price, how close can I get to it on average (amortized over all fund option trades)?  I have not thoroughly analyzed the data yet, but I’d guesstimate I’m missing the option midprice by about 70 BP.  Add that to net option trading costs and we’re talking 100 BP… a whole 1%.

If my goal was to strictly follow the BXM, with monthly call writes, 100 BP could easily translate to a portfolio BP of 60. Unacceptable.  Therefore I’ve been writing longer calls (2-6 months).  This helps keep costs, seen and “unseen” down.  Nonetheless I’m strongly considering using BXM as a fund benchmark.

As fund assets grow, assuming they do, the relative direct option trading costs will decrease.  Perhaps with significantly larger trades 30-35 BP will, over time, decrease to 10 BP.  But the unseen spread-related ratio will not improve with increased trading volume or trade size. That is why I am researching trading strategies and algorithms.

Since I am not striving for high leverage (say >3X) I am relatively indifferent to whether a given option is technically covered or merely effectively covered.  Do I really care if my SPY call writes are covered with SPY or an equivalent amount of VOO?  Not really.  Do I really care if whether I write 1o Dec SPY calls at 117 versus 5 at 116 plus 5 at 118?  Not much.  Except if one gives me a better overall price… or the best chance at a better price.

If you’ve ever optimized digital logic with a K-map you  know how valuable “don’t cares” can be.  I’m trying to identify don’t cares for Σ1, and exploring ways to get higher prices for my option writes.  I’m also learning more about the nuances and details of exchanges and trading.  My goal is simple: buy low, sell high.