RPRX Case Study – October 2013

Summary

This is an event trade on a high-volatility, small-cap stock.  The Tradelegs Optimized Strategy increased the expected returns on a fund’s original option strategy almost tenfold, while having the same potential worst-case risk and capital usage. On a marked-to-market basis, the Tradelegs Strategy generated better returns on 29 of the 30 days and ended up profitable, while the Original Strategy incurred a small loss.

Note that the strategy generated using Tradelegs was not executed, but was backtested on the same basis as the original reference strategy.

Background

• RPRX – Repros Therapeutics
• Trade Date: September 9^th 2013 / Target Date: October 19^th 2013
• Repros Therapeutics [RPRX] is a biotech company focused on endocrine disorders. The company’s lead program has been de-risked by several successful Phase II studies as well as a successful Phase III study. There is one remaining Phase III efficacy study that will be released in October and the outlook is positive
• The Portfolio Manager of an Event-Driven fund put on a trade in an attempt to capture his bullish view on RPRX and protect him against “company-specific trial execution risk”
• We used Tradelegs to identify a better trade with equal or less capital at risk and a lower breakeven point

Assumed PM Prediction and Constraints

Case Study Results

Expected Returns on Entry (Sep 2013)

• The Tradelegs Proposed Strategy is expected to outperform the fund’s Reference Strategy by an average of 970% under normal volatility conditions, and by an average of 200% under adverse volatility
• The Tradelegs Strategy meets all the fund’s trading constraints — even those that their original trade violated
• The Tradelegs Strategy has almost a 15% higher probability of profit inside the predicted range

P&L Payout Curve

Optimized Strategy Maximizes profit in the prediction range Flattens out in the ranges outside the prediction range so that it could capture more profit inside the prediction range Offers increased protection should the stock move against the fund, by delaying cross-over to loss
Reference Strategy Requires more than a 15% move to break even Peaks outside of the prediction Accelerated downside slope bottoms out much sooner than the Optimized Strategy

Case Study Conclusions Actual Backtest Results (Oct 2013) The positions were marked-to-market each day until the expiration date of the PM’s Reference Strategy On the expiration date, the PM’s Reference Strategy lost $63k while the Tradelegs Strategy made a $40k profit The Tradelegs Strategy outperformed the fund’s strategy on 29 out of 30 days The Tradelegs Optimized Strategy sustained lower losses on the worst performing days of the trade In this small-cap, high volatility case study, Tradelegs generated an Optimized Strategy that outperformed a trade from a successful event fund managing over $8b of assets Whether you are an occasional options trader or an experienced options strategist, Tradelegs’ advanced decision-support technology can give you a substantial edge over trading unaided