Behind the Scenes: Lattco

by Tom Doan

In the Snider Investment Method, Lattco is used as our primary stock selection tool to open new positions.  Lattco will use your current Stake and Allocated Cash numbers to generate positions suitable for your account.  Many clients wonder what criteria Lattco is looking for when it’s generating a position.  The screens built in Lattco look for option volume, open interest, and bankruptcy scores to weed out positions.  In addition to the screens, Lattco also has sector diversification and the adjustment factors built into the process.

Since the Snider Method utilizes options to generate premium, we must have positions that make it easy for us to sell options.  This is what the option volume and open interest screens look for.  Option volume is the number of options that are traded on a particular day and open interest is the number of open options that have not been closed.  Higher option volume and open interest means the market is more liquid, making it easier for us to sell options and receive efficient prices.

Lattco uses a SIM score and ZETA score to screen for positions that are most appropriate for Snider Method postions.  ZETA is a bankruptcy predictor designed to provide early red flags if a company may go bankrupt years in advance.  Although ZETA help us reduce the risk of bankruptcy, it does not eliminate it; nothing can.  The SIM score looks at the price volatility history of a position and removes the potential positions that are the most volatile.

Although many positions will pass through Lattco’s screens, only the ones that suit your account will be generated for you.  To do this Lattco looks at your account’s current positions.  Each position is classified into ten different sectors, from financial services to technology and utilities.  Based on the current makeup of your positions, Lattco will attempt to diversify between the different sectors.  For example, if 30% of your Stake is allocated to technology, Lattco may generate a position in consumer good or a different sector outside of technology.  The sector diversification along with the Unallocated Cash amount will help Lattco determine the price range and sector of your new position.

I have had clients call and wonder why their Allocated Cash is larger than the Stake and if this is normal.  This is most likely due to the Adjustment Factor built into Lattco.  With larger accounts, the probability of the positions using all of the Allocated Cash is very slim, thus Lattco will use an Adjustment Factor to artificially increase the Stake and potentially generate additional positions.

Occasionally, on Trade Day I’ll receive a question from a client asking if they can remove the position generated by Lattco because they had a bad experience with it before and want to avoid it. Just remember that past results are not indicative of future performance and you cannot predict the future. If you remove the position generated by Lattco for another one, you are telling Lattco to exchange the position best suited for your account for the next one down the list.

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