1. The BlackScholes Option Pricing Model is not always
effective for equities indexes Eganov Asset Management Partners
Denis Eganov & Alexander Kurguzkin www.eampartners.com 1
24
2. Introduction An idea that is not dangerous is unworthy of
being called an idea at all. Oscar Wilde 2 24
3. About the Company Eganov Asset Management Partners
(EAMPartners) is an investment company that was founded in 2012
EAMPartners manages a hedge-fund Eganov Asset Management
Stocks&Derivatives Strategies S.P. (EAM Strategies), using
option strategies with high levels of return/risk The company
provides asset management services exclusively to qualified
investors The company doesn't offer services to residents of the
USA 3 24
4. Denis Eganov Partner, Director and Marketing Strategist
Since 2012 he has created and developed EAM Strategies hedge-fund
From 2003 to 2008 he created and managed the biggest fund family in
Russia From 1999 to 2003 Denis was a Head of an Asset Management
Company From 1997 to 1999 he was a Fixed Income Trader 4 24
5. Alexander Kurguzkin Partner, Chief-trader and Risk-manager
Since 2012 he has developed algorithmic trading systems and
estimation methods for options Since 2012 he has managed a web-site
for traders: www.long-short.ru Alexander is the author of Exchange
Trading: Playing the Game by its own Rules (2009) He created
algorithmic trading strategies for the trading of equities in the
Russian stock market from 2002 to 2012 5 24
6. Problem The first step in solving a problem is to recognize
that it does exist. Zig Ziglar 6 24
7. The Mathematical Formula linked to the Financial Crash In
2012 the BBC published an article Black-Scholes: The maths formula
linked to the financial crash In 1997 Myron Scholes won the Nobel
memorial prize. The next year, his hedge fund Long-Term Capital
Management crashed and it lost almost all its assets, about 4
billion dollars Nevertheless the model Black-Sholes is still
installed in all computer programs for estimating the value of
derivatives in banks and investments companies 7 24
8. Why does the Formula Black-Sholes result in Losses? The
BlackScholes Option Pricing Model supposes future changes in prices
obeys the law of normal distribution (Gaussian distribution). But
in real trade in options, for the majority of classes of assets the
assumption of normal distribution of future price changes is often
ineffective for the following reasons: significant asymmetry -
prices is far more volatile in a falling market than in a growing
market strong volatility clustering can be observed heavy tails in
price returns distribution - there is an increased probability of
strong price movements 8 24
9. EAM Strategies used the Black-Sholes Option Pricing Model We
used the formula Black-Sholes in trading in the Russian stock
market from 2013 to May 2014. Our hedge fund earned nothing! 65 75
85 95 105 115 Jan 2013 Apr 2013 July 2013 Oct 2013 Jan 2014 Apr
2014 July 2014 The performance of EAM Strategies hedge fund The
performance the index RTS 9 24
10. The problems of using the Black-Sholes Option Pricing Model
Most funds use the Black Sholes Option Pricing Models and the
result has been major losses in periods of high price volatility If
we examine the performances of hedge funds in the periods of autumn
2008 and August 2011, we see the funds lost about 80% of AUM during
these periods 10 24
11. Decision You can never solve a problem on the level on
which it was created. Albert Einstein 11 24
12. Problem-solving in Valuation of Options We have created and
are using an alternative option pricing method which allows us: to
get quantitative estimations which takes into account the price
features of the equities indexes to use historical data to
reconstruct price returns distribution for option price valuations
to use volatility normalization which takes into account volatility
clustering effect 12 24
13. Results of Backtesting of our Strategies We have backtested
our option pricing method. The graph provides a comparison with
index S&P500: 80 120 160 200 240 280 Jan 2011 Apr 2011 Jul 2011
Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul
2013 Oct 2013 The results of the backtesting of the strategy of EAM
Strategies: The average annual profitability +59.42% The maximum
drawdown 11.10% The standard deviation 7.68% The performance the
index S&P500: The average annual profitability +13.68% The
maximum drawdown 16.90% The standard deviation 3.52% 13 24
14. Performance on August 01, 2015 This graph presents the
current performance of EAM Strategies, as confirmed by
administrator Apex, using our option pricing method in comparison
with the index S&P500: 14 24 100 110 120 130 May 2014 Jul 2014
Oct 2014 Jan 2015 Apr 2015 July 2015 The performance of the EAM
Strategies The annual profitability +20.28% The maximum drawdown
-10.02% The standard deviation 10.79% The performance of the index
S&P500 The annual profitability +10% The maximum drawdown
-3.10% The standard deviation 3.59%
15. Our trading breaks down into three complementary
strategies: 1. Long option call has to earn a lot of money in the
rising market. This strategy gives a controlled loss in the flat
and in the declining market 2. Long Treasuries stabilizes exposure
to market which arose in the first strategy and makes up the risks
of the bearish market 3. An accumulation of put option prices
should make a profit in the all slow market movements 15 24
16. Investments Process Before the beginning of a trading
session on the CBOE a chief-trader makes a valuation of options for
index S&P 500 The chief-trader calculates the sizes of
positions using the Kelly criterion. The current level of drawdown
is taken into account for the purpose of controlling the maximum
level of drawdown In regular trading, portfolio positions are
adjusted in accordance with calculation data In cases where stock
market is unfavorable to our short position in options, these
options will be closed 16 24
17. Conclusion Of course it is just a trifle, but there is
nothing as important as the trifles. Arthur Conan Doyle 17 24
18. Conclusions Using the BlackScholes Option Pricing Model for
equities indexes is largely ineffective In our model of valuation
options we calculate option prices taking into account a wide range
of value criteria, such as underestimating and overestimating
options out of the money for equities indexes 18 24
19. Conclusions Our strategies develop options positions taking
into account market volatility. This allows us to protect assets in
unfavorable markets and use the opportunities created by a rising
market On this basis, we expect our methods will have a better
return/risk ratio than hedge-funds using the traditional ways of
dealing in options 19 24
20. Why do you think you are better than the funds in your
asset class? Our team doesnt use the BlackScholes Option Pricing
Model in our trading of options. We created our own model of
evaluating options for equities indexes. It helps us to make more
precise valuations of option prices and it has shown to be more
effective than funds with option strategies using the BlackScholes
Option Pricing Model We buy Treasury ETF to diversify the risk in
the trading of options Portfolio managers make their own personal
investments in the fund 20 24
21. Who are your Business Partners? Our fund conducts business
with the leaders of world financial industry, such as: Broker
companies: Interactive Brokers Group, Inc. Exante Bank: HSBC Audit
company: Deloitte Independent accounting, money transfer and
administration: Apex Fund Services 21 24
22. A Hedge-Fund Eganov Asset Management Stocks&Derivatives
Strategies S.P. Foundation January 17, 2013 Jurisdiction Cayman
Islands Initial stock price $1 000 Subscription amount $100 000
Subscription period Monthly Redemption period Monthly Redemption
notice 5 days Performance fee 20% High Water Mark Management fee
2.0% annually Lock-up period No Ticker in Bloomberg EAMDSSP KY ISIN
KYG1988M1657 22 24
23. Subscription Enter a subscription to EAM Strategies using
the administrator Apex Fund Services: Exchange House, Athol Street,
Douglas Isle of Man, IM1 1JD Telephone: +44 1624 630400 Fax: +44
1624 630401 www.apexfundservices.com 23 24
24. Contacts Thank you for your attention! If you have any
questions ask Denis Eganov Email: [email protected]
www.eampartners.com 24 24
