1. Prepared by George G. Namur, Ph.D.
January 2017
Dual Strategy
Equity Derivatives Fund
2. Confidentiality
Dual Strategy Equity Derivatives Fund2
This information is privileged and confidential.This
presentation includes descriptions of methodologies and
concepts derived through substantial research and
development efforts. No part of this presentation may be
reproduced by any means or transmitted without the written
permission of Dr George G. Namur.
3. Dual Strategy Equity Derivatives Fund3
The Fund in a Snapshot
Options Strategy
QuantitativeVolatility Strategy
Dual Strategy Structure and Performance
Highlights of Private Placement Memorandum
Highlights of Prospective Organization
Bios
Contact Information
Appendices
Overview
4. The Fund in a Snapshot
Dual Strategy Equity Derivatives Fund4
5. The Fund in a Snapshot
Dual Strategy Equity Derivatives Fund5
The FCA-regulated London based fund will combine two complementary
strategies to generate high returns while limiting volatility
Long-Biased Options
Strategy
QuantitativeVolatility
Strategy
Equity options primarily The strategy serves to de-risk
the options strategy
• The two strategies are loosely correlated (correlation of 0.115)*
• The combination features a barbell strategy where more weight is allocated to
the lower risk strategy
* Monthly returns from Jan 2012 to Dec 2016 were used in computations
6. Dual Strategy Equity Derivatives Fund6
The Fund in a Snapshot
A Complimentary Combination
Options Strategy
QuantitativeVolatility
Strategy
Up Markets
Theoretical Allocation
(20-80)
• Relatively higher allocation
• Higher returns (leverage effect)
• Asymmetric exposure
• Likely to outperform
• Serves to reduce fund’s volatility
• Performance not correlated with
market
Sideways or
Down Markets
Theoretical Allocation
(10-90)
• Opportunities for bearish positions
• Using spreads rather than outright
positions may be appropriate
• Relatively higher allocation
• Investment opportunities (arbitrage,
relative value, carry trade, etc.)
unaffected by market direction
• Likely to outperform
8. Dual Strategy Equity Derivatives Fund8
Long biased, long options (long risk)
Primarily US equities
Discretionary with quantitative enhancements
Stereoscopic approach (top down and bottom up)
Combines global macro, fundamental, technical and sentiment
analysis
Favors growth over value or income on the long side
Shorts broken companies, not “expensive” stocks
Options Strategy
9. Dual Strategy Equity Derivatives Fund9
Outright
positions and
spreads
Strategy allows for
leverage without
margin (no margin
call risk)
Bearish positions
consist of long
put option
positions
In bull markets,
most positions are
long call option
positions
Primarily long
option positions
Long-biased
Options
Strategy
Options Strategy - Overview
10. The main focus of the
strategy. Including
ADRs. Both the
stocks and their
corresponding
options need to be
liquid
Options on FX futures
(different from
options on FX)
Dual Strategy Equity Derivatives Fund10
FX Futures
Provided
options are
liquid and trade
electronically
Provided index
is optionable
and options are
liquid
Five different types of securities underlie the options
portfolio
1
5
4
Including
leveraged ETFs on
occasion
2
3
11. Dual Strategy Equity Derivatives Fund11
• Focuses on major central banks and impact on liquidity
• Consequences on developed and emerging markets
• Analyses the trends in interest rates and currencies
Global Macro
Analysis
• Both top down and bottom up approach
• Used to identify sectors and industries in favor
• Not meant to pick low valuation stocks
Fundamental
Analysis
• Necessary for initiating and adding to positions
• Catches shorter term moves
• Helps with position sizing
Technical
Analysis
• A very useful contrarian tool
• Signals meaningful at extremes
• Identifies changes in trend
Sentiment
Analysis
The investment approach consists of a combination of
four key analyses
12. Dual Strategy Equity Derivatives Fund12
Top down and bottom up
Top Down
Global Macro
Central banks’ stance
Level and trend of
interest rates and
yield curve
Trend for US dollar
Assessment of the Cycle
Expansion vs.
contraction
Early cycle vs. late
cycle
Bottom Up
Favor Growth OverValue
Avoid high dividend
yielding stocks
Avoid focus on cheap
stocks and value traps
Factor In Risk Appetite
Requires a read on
investor psychology
Invest in market
leadership
Capture
Secular
Themes
Like industrial and
energy renaissance;
biotechnology
advances; baby
boomers retirement,
millennials’ trends
Respect
Technicals
Charts identify trends
before news are out
Additionally, the approach is stereoscopic and spans
several factors and sub-factors
13. Dual Strategy Equity Derivatives Fund13
Portfolio
of Long
Options
No margin or
margin calls
No
diminishing
returns
adding new
names
Ability to
add names
without
deploying
more cash
Tremendous
flexibility in
risk
management
Asymmetric
exposure
thanks to
positive
gamma
A portfolio of long options is typically characterized by
five advantages
15. Dual Strategy Equity Derivatives Fund15
Risks inherent to
a long-biased equity hedge
fund
Risks
associated with
using options rather than
stocks
The two main risk areas for this type of options
strategies have been identified
16. • Diversification (large number of positions)
• Proper rolling of options
• Need at times to park money in short term paper
• Options are inherently less liquid than stocks (lower volume, wider spreads)
• Limiting rolling of less liquid options as a roll involves crossing bid/ask twice
• Avoiding illiquid options and options on illiquid stocks/ETFs
• Focus on longer dated options for calls (LEAPs when available)
• Not a problem for puts as those are normally held for smaller periods
• Limit portfolio concentration across both names and sectors
• Switch to spreads during trendless markets
Dual Strategy Equity Derivatives Fund16
Time Decay
A risk mitigation strategy significantly reduces the impact of
three important risks associated with using options rather
than stocks
Leverage
Liquidity
18. Dual Strategy Equity Derivatives Fund18
Portfolio of
Options
Through rolling of options, one can
add more names while keeping same
delta exposure to existing names,
and without using new money
Portfolio of Stocks
Adding more names involves either
selling or reducing some existing
positions or using fresh cash
The impact of diversification is greater in portfolios of
options than in portfolios of stocks
The more names, the better.The
benefit of adding more names does
not diminish
Beyond a certain number, adding
more stocks will have almost no
beneficial effect
19. Dual Strategy Equity Derivatives Fund19
Compare two hypothetical portfolios worth $100,000 each
Portfolio 1 consists of 500 shares of stock A and stock B, both trading at $100
Portfolio 2 consists of 100 ATM call options on stocks A and B of a certain
maturity, both trading at $5
Assume news causes stock A to rise 50% (to $150) and stock B to fall 50% (to
$50)
The post-news value of Portfolio 1 remains the same
The post-news value of Portfolio 2 rises dramatically (value of the options on B
fall to almost zero, but value of options on A go up to say $55) to over $500,000
Example: Portfolio of Options vs. Portfolio of Stocks
20. Dual Strategy Equity Derivatives Fund20
• Global macro analysis
• Assessment of the
cycle
• Identification of right
sectors
• Go long names in sectors
in favor
• Go long names that have
exceptional stories
regardless of sector or
industry
• Go short broken
companies rather than
expensive stocks
• Determine right options
(strike, maturity) as well
as initial sizing based in
part on conviction level
• Driven by overall portfolio risk levels (VaR,
actual losses)
• Rolling of options and position sizing to
manage concentration risk and leverage
• Scenario analysis
Strategic
Allocation
Stock
Picking
Risk
Management
Risk management, stock picking and strategic
allocation are at the heart of the investment process
21. Dual Strategy Equity Derivatives Fund21
The portfolio’s edge is materialized through both a
research alpha and a manufactured alpha
23. Dual Strategy Equity Derivatives Fund23
The GVV cost framework
The quantitative volatility strategy is based on a cost framework that
breaks down an option to it’s basic components.The framework is
referred as the GammaVannaVolga (GVV) model.
The GVV cost framework offers a new approach to analyzing the
value of derivatives contracts by directly linking the daily cost of
options to their realized value.
Daily cost of
options
Realized value
of options
24. Dual Strategy Equity Derivatives Fund24
The quantitative volatility strategy primarily identifies
relative value and carry trades using a Gamma1 Vanna2
Volga3 (GVV) cost framework
Innovative and
proprietary
volatility
framework
Identify relative value and
carry trades
Profit from volatility-
arbitrage opportunities
Limit and manage risk
Enhance valuation of
derivative contracts
1. The Gamma of an option is the second derivative of the option value with respect to the underlying price
2. TheVanna of an option is the sensitivity of the option delta with respect to change in volatility; or alternatively, the sensitivity of Vega with respect to
the underlying price
3. TheVolga of an option is the second derivative of the option value with respect to the underlying’s implied volatility
25. Dual Strategy Equity Derivatives Fund25
The GVV cost framework - Example
For instance, the model quantifies the daily costs of owning a 3-
month as well as a 1-year crash risk insurance on the S&P 500 Index
If the market prices these daily costs at the same level, the model
would suggest owning the 3-month crash risk while simultaneously
selling the 1-year crash risk
The aggregated position would therefore be long crash risk for free
(in the event of a crash, the 3-month crash protection would yield
much higher profits than the 1-year crash protection)
26. Dual Strategy Equity Derivatives Fund26
The GVV cost framework follows a well-defined, 3-step
investment process
Define
Investment
Universe
Scan
Opportunities
Manage
Portfolio
Regional focus (United States)
Operate under the new volatility
framework
Monitor positions closely
Major index volatility products (e.g.
VIX options,VIX futures, etc.)
Analyze volatility, skew, convexity
signals
Manage risk constantly and
efficiently
Liquid products
Identify compelling relative value
and carry trade opportunities
Utilize models to identify entry and
exit points
Minimum slippage Analyze risk/reward profile
Hold positions on average between 3
and 6 months
27. GVV Cost Framework
Dual Strategy Equity Derivatives Fund27
The GVV cost framework breaks down the option implied
volatility into three cost components
Cost of an Option is the Sum of:
Volatility Cost Skew (Crash) Cost Convexity Cost
Portion of the implied
volatility that is a measure
of risk aversion or risk
anticipation and insures
against a crash of the
underlying
Portion of the implied
volatility that represents the
uncertainty of the volatility,
i.e. the volatility of volatility
Portion of the implied
volatility that reflects the
expected variation in the
returns of the underlying
28. Dual Strategy Equity Derivatives Fund28
Arbitrage is a central component of the strategy and
includes both pure and volatility opportunities
Pure Arbitrage
Opportunities
Volatility Arbitrage Opportunities
RelativeValue CarryTrades
• One set of derivative
assets will converge
to another asset at a
time in the near future
• Focus on trading pricing anomalies
within different underlying indices,
and/or related products such as the
VIX vs. S&P 500 options
• Held until either the implied volatile
levels converge or until maturity
• Arbitrage opportunities of secondary
Greeks (Gamma,Vanna,Volga) across
various maturities
• Focus on carry trades that will earn
carry while limiting market exposure
29. Dual Strategy Equity Derivatives Fund29
Detailed examples of actual trades undertaken using
the GVV cost framework can be found in Appendix B
1,000 of SPX
condor
CarryTrade (2)
6.7%
per month
9 months
$4.4M
Crash Protection
(3A)
10.2% 2 days
$4.3M
RelativeValue
Arbitrage (1A)
30% 2 months
$7.4M
RelativeValue
Arbitrage (1B)
18.5% 8 days
$3.6M
Crash Protection
(3B)
6.6% 2 days
Initial Investment Return Time Frame
31. Dual Strategy Equity Derivatives Fund31
Common risks associated with the quantitative volatility
strategy are constantly monitored and carefully managed
No directional view on the broad
market Liquidity
Risk
Redemption
Risk
Herd Risk
“Greek”
Risk
Counter-
party Risk
Market
Risk
Investments in liquid instruments such
that borrow/liquidity risk is diminished
Minimum exposure to simultaneous exit
from common strategies
Constant monitoring and
management of all options-
related risk exposures
Minimized by imposing
redemption frequency and
sufficient redemption notice
period and by investing in
liquid instruments
- Engagement into listed trades,
when possible, in order to minimize
counter-party risk
- Benefits from the cross margining
provided by banks on given volatility
products to reduce costs where
possible
33. Dual Strategy Portfolio Allocation and Guidelines
Dual Strategy Equity Derivatives Fund33
Dynamic allocation between the two strategies at the manager’s
discretion
More weight is assigned to the QuantitativeVolatility strategy
consistent with the barbell approach that allocates more funds to the
lower risk strategy
Allocation is a function of market conditions.Adverse markets would
make the options strategy relatively riskier, so risk parity would guide
the manager to reduce the allocation to this strategy to below the base
case
34. Dual Strategy Historical Performance
Dual Strategy Equity Derivatives Fund34
The performance statistics in the next several slides are obtained by
combining those from an options portfolio, run by the fund’s
prospective manager and those from a portfolio using the quantitative
volatility strategy
This quantitative volatility strategy is used on the equity derivatives
desk of a major bank in NY and run by one of the fund’s prospective
portfolio managers
To turn the desk’s P&L into returns, it was assumed that the desk in NY
is working with a constant $100 million monthly budget.The
quantitative strategy’s returns are therefore obtained by dividing the
actual monthly P&L numbers by a constant $100 million
35. Variations of Strategy Allocations with Key Metrics*
Dual Strategy Equity Derivatives Fund35
Combination 1
(Low Allocation)
Combination 2
(Base Allocation)
Combination 3
(High Allocation)
Weight of Options Strategy 10% 15% 20%
Weight of QuantitativeVolatility
Strategy
90% 85% 80%
Best Month 10.04% 14.45% 18.86%
Worst Month -6.75% -7.14% -7.55%
CAGR 25.89% 29.65% 33.29%
Correlation with S&P 500 0.55 0.46 0.56
Standard Deviation 10.81% 14.46% 18.30%
Sharpe Ratio 2.20 1.88 1.68
Sortino Ratio 3.30 3.15 2.90
* Monthly returns from Jan 2012 to Dec 2016 were used in computations
36. Correlation* of the Dual Strategy with the S&P 500
Dual Strategy Equity Derivatives Fund36
Up Months Down Months
Combination 1 (10-90) 0.42 0.16
Combination 2 (15-85) 0.42 0.15
Combination 3 (20-80) 0.41 0.15
* Monthly returns from Jan 2012 to Dec 2016 were used in computations
37. Dual Strategy Equity Derivatives Fund37
Average returns, standard deviation and CAGR increase while the
Sharpe ratio decreases as more and more weight is allocated to the
options strategy
Index futures and futures options markets are deeper than single
stock options’; larger AUM likely to favor higher allocation to
quantitative volatility strategy
Correlation coefficient between the two strategies is 0.115
3-monthTreasury bills used as a proxy for risk-free rate to compute
excess returns and Sharpe ratio
Dual Strategy Assumptions and Interpretations
39. Fee Structure
Dual Strategy Equity Derivatives Fund39
• Assets under management will be subject to an annual management
fee of 2%
• The fee will be charged on the first business day of every quarter on
the net assets under management as of the last business day of the
previous quarter
• Profits will be subject to an annual performance fee of 20%.
• The fee will be charged on the first business day of every quarter on
the previous quarter profits in excess of the high-watermark, after
the management fees are deducted
42. Dual Strategy Equity Derivatives Fund42
General Partners
CIO
Portfolio
Management
Traders /
Analysts
Investment
Committee
Head of
Marketing
CRO
Risk
Management
COO
External
Advisory
Board
A management committee oversees four core functions
and is supported by an external advisory board
43. Service Providers
Dual Strategy Equity Derivatives Fund43
Investment
Manager
Company
UBS London
(Prime Broker)
PWC London
(Auditor)
HSBC London
(Banker)
Dechert London
(Law Firm)
Citco London
(Administrator)
FCA
(Regulator)
44. Dual Strategy Equity Derivatives Fund44
Investors
Limited Partners
Fund Entity
General Partners Investment Manager
(London LLC)
Master Fund
(Cayman Islands LLP)
Feeder Fund
(Delaware LLP)
US Investors
Feeder Fund
(Cayman Islands Company)
Non-US Investors
InvestmentAdvisor
(Cayman Islands LLC)
Fund Structure
45. Transactions under Master-Feeder Structure
Dual Strategy Equity Derivatives Fund45
US Investors will invest in the US feeder fund, while non-US and
tax-exempt US investors will invest in the offshore feeder fund
The master fund will pool the investments from both feeder funds
and the investment manager company will manage the assets
directly from the master fund
Management fees will be collected by the investment manager
company and performance fees will be collected by the investment
advisor company
Net profit will be distributed to each feeder fund separately
46. Distribution of Fees and Capital Gains
Dual Strategy Equity Derivatives Fund46
U.S. Feeder Fund Offshore Feeder Fund
Master Fund
InvestmentAdvisor
Company
General Partners
Capital GainsCapital Gains
Performance
Fees
Performance
Fees
Investment Manager
Company
Management
Fees
Management Fees
Net Expenses
47. The Master-Feeder structure significantly increases tax
efficiency for all parties
Dual Strategy Equity Derivatives Fund47
• Investments in the fund will not be treated as investments in a Passive Foreign
Investment Company, which has significantly higher tax rates
• No double-taxationUS Investors
• Avoid US tax regulations
• Anonymity
Non-US
Investors
• No US self- employment tax
• Non-US general partners will not be subject to US income tax if they pass the
“presence test”
General Partners
48. Dual Strategy Equity Derivatives Fund48
Communication
Open channels of
communication with
investors
Detailed monthly
report with
administrator-
provided NAV
Transparency
Critical factor for
success
With General
Partners as well as
Limited Partners
Risk
We are in risk
business, so prudent
risk is embraced
First rule to making
money is to not lose
money
Trading to make
money as opposed to
trading to not lose
money
Idea Generation
Ideas start with PM
(with trader and
analysts)
Major calls go through
Investment
Committee
External Advisory
Board provides a fresh
perspective
Four cornerstones govern the fund’s philosophy
49. Dual Strategy Equity Derivatives Fund49
Factors Affecting Choice of
Locations
Credibility
Availability of talent
Cost of business, including taxation
Convenience of time zone relative to
trading hours
1
2
3
4
Switzerland
Two potential fund locations were identified and
assessed based on specific business factors
Key Pros Key Cons
US
• Perfect time
zone
• Best talent
pool
• High
corporate
taxes
• Increasingly
tough
regulatory
environment
UK
• Second best
location for
hedge fund
• Good talent
pool
• Trading
hours
• Uncertainty
over taxation
51. Dual Strategy Equity Derivatives Fund51
Professor of Finance at the Olayan School of Business at theAmerican
University of Beirut.Teaches finance classes including “Hedge Fund
Strategies”, “Derivative Securities” ,“Investment Management”, and
“Valuation Methods”
Teaches CFA Level I, II, and III classes related to Fixed Income
Portfolio Management, Derivatives,Alternative Investment, Risk
Management and Quantitative Methods as well as a FRM class on
Quantitative Analysis at the Institute for Financial Analysts (IFA)
Two decade experience trading various markets (currencies, equities,
fixed income and commodities). Stock picking skills based on
stereoscopic analysis
Dr. George G. Namur
52. Dual Strategy Equity Derivatives Fund52
In-depth expertise in derivatives and risk management
Affiliated with the Gerson Lehrman Group as an expert on
commodities, resources and financial services
Previously CEO and Managing Partner atVermont Harding
Management Ltd, an alternative asset management firm based on
systematic foreign exchange trading
Dr. George G. Namur
53. Dual Strategy Equity Derivatives Fund53
He started Namur Capital Management in 2001, a wealth management
and advisory firm. He managed clients money as Separately Managed
Accounts. He focused on global macro trends and his trading was
driven by his macro views, including market risk appetite. He
supplemented his fundamental analysis with technical, cyclical as well
as sentiment analysis
Formerly General Manager at ShellTrading (previously Coral Energy)
in Houston, managing energy-related assets worth several billion
dollars. Introduced the concept of front office risk management.
Developed a portfolio of synthetic power assets allowing the firm to
become a major player in electricity trading
Dr. George G. Namur
54. Dual Strategy Equity Derivatives Fund54
Worked at the prestigious Capital Market RiskAdvisors in NewYork
where he advisedWall Street firms, banks and asset managers on risk
management and derivative valuation. Experience at CMRA inculcated
a risk-based discipline in trading and asset management
Trained in derivatives at Chase Manhattan Bank, now JPMorgan Chase
in NewYork
MBA in Analytical Finance and Business Economics from the
University of Chicago Booth School of Business, and Ph.D. in Civil
Engineering from the University of Michigan,AnnArbor
Fluent in Arabic and French
Dr. George G. Namur
56. Dual Strategy Equity Derivatives Fund56
Senior equity derivatives trader for a major bank in NewYork
Joined the bank in 2000 and has been managing the risk on the S&P
500 index options portfolio since 2004
Main responsibilities include market making, customer facilitation and
proprietary trading as well as overseeing risk on other derivative
products
Helped develop volatility marking methodologies that analyze relative
value opportunities in secondary risks
MS in Financial Engineering degree from Columbia University and
MBA in Finance from the City University of NewYork
58. Dual Strategy Equity Derivatives Fund58
For further enquiries, please contact
George G. Namur, Ph.D.
george.namur@namurcapital.com
+1 (917) 421-9866
+961 (71) 100977
Contact Information
69. Appendix B
Examples of Actual Trades Using the GVV
Framework
Dual Strategy Equity Derivatives Fund69
70. Dual Strategy Equity Derivatives Fund70
Example 1A – Relative Value Volatility Arbitrage
Description
Relative value strategy on theVIX vs. the S&P 500 (SPX) Indices
(Category IType Strategy) implemented on October 2, 2012
Motivation
TheVIX December 2012 Gamma Breakeven (orVolatility) levels were higher by
12 volatility points compared to theVolga Breakeven (or Convexity) levels of the
January 2013 SPX options
Theoretical
Underlying
The recently popularVIX andVXX options along with the options on realized
variance can be broken down to their Gamma,Vanna andVolga components and
ultimately compared to plain vanilla SPX options.This ultimately results in
identifying the most of efficient product that creates gamma and thus relative
value opportunities amongst related volatility products
71. Dual Strategy Equity Derivatives Fund71
Example 1A – Relative Value Volatility Arbitrage
Trade
• Sell 10,000VIX Dec 21 calls vs. 19 in theVIX December Futures for 2.2
• Sell 1,000 SPX Dec 1400/1500 strangles to buy 2,000 Jan 1225/1575
strangles with a reference price of 1440 in the SPX futures
• The trade was theta neutral
• Unwind Date: December 12, 2012
Results
• SPX strategy is worth 0.9 cents vs. 1440 yielding profit of USD 1.44 Million
• VIX calls are worth 0.1, yielding profit of USD 2.1 Million
• VIX Futures hedge was 500 Futures at 19 vs. 15.5 resulting in a loss of USD -
2.25 Million
• Net Profit: USD 1.29 Million (30 % return on a USD 4.3 Million initial
investment over a period of 2 months)
72. Dual Strategy Equity Derivatives Fund72
Example 1B – Relative Value Volatility Arbitrage
Description
Relative value strategy on theVIX vs. the S&P 500 (SPX) Indices (Category IType
Strategy) implemented on November 12, 2012
Motivation
TheVIX January 2013 Gamma Breakeven (orVolatility) levels were lower by 10
volatility points compared to theVolga Breakeven (or Convexity) levels of the
February 2013 SPX options
73. Dual Strategy Equity Derivatives Fund73
Example 1B – Relative Value Volatility Arbitrage
Trade
• Buy 1,500 SPX Feb 1275/1325/1450 put trees vs. 1374 in the SPX
December Futures for 39.7
• Buy 5,000VIX Jan 20 calls vs. 20.4 in theVIX December Futures for 2.9
• Unwind Date: November 20, 2012
Results
• SPX Feb put tree is worth 45.5 vs. 1374 Dec Futures level resulting in a
profit of USD 870,000
• VIX Jan 20 calls vs. 18.65 is worth 1.97 resulting in a net profit of USD
500,000
• Net Profit: USD 1.37 Million (18.5% return on a USD 7.4 Million
investment over a period of 8 days).
74. Dual Strategy Equity Derivatives Fund74
Example 2 – Carry Trade
Description
• This carry trade on the S&P 500 index (Category II) was followed from the
first part of 2012 until September 2012
Motivation
• For the first part of 2012 the implied dailyVanna Breakeven (or Skew) for SPX
1-month options were 1% while the realizedVanna was around 20 bps
75. Dual Strategy Equity Derivatives Fund75
Example 2 – Carry Trade
Trade
• During this period a rolling strategy of the 1 m 103/97/94/90 put condor
would focus on earning carry on a daily basis for flat gamma andVolga
Results
• This strategy was successfully followed until Sep 2012 when the skew levels
flattened to approximately 50 bps per day
• Overall this strategy would yield approximately USD 30,000 per 1,000 of SPX
condors (6.7% return per month consecutively for a period of 12 months)
76. Dual Strategy Equity Derivatives Fund76
Example 3A – Crash Protection Strategy
Description
This crash protection strategy usingVIX Index Options (Category IType
Strategy) was implemented onApril 11, 2013
Motivation
TheVIX May 2013 Gamma Breakeven (orVolatility) levels were lower by 15
volatility points compared to theVolga Breakeven (or Convexity) levels of the
June 2013VIX options
77. Dual Strategy Equity Derivatives Fund77
Example 3A – Crash Protection Strategy
Trade
• Buy 10,000VIX May 2013 14-15 Strangle vs. 14.5 reference
• Sell 10,000VIX June 2013 15-16 Strangle vs. 15.5 reference
• Structure FairValue: 1.025
• Unwind Date:April 15, 2013
Results
• As promised, the strategy performed very well in a sharp move down,
yielding almost 50% within a period of 2 days without any decay.The fair
value of the structure on the unwind date was 0.55
• Net Profit: USD 0.45 Million profit on a USD 4.4 Million investment
(10.2% return in 2 business days)
78. Dual Strategy Equity Derivatives Fund78
Example 3B – Crash Protection Strategy
Description
In the same spirit, the previous strategy could have also been implemented by
trading S&P 500 Index Options (April 11, 2013)
Motivation
TheVIX May 2013 Gamma Breakeven (orVolatility) levels were lower by 15
volatility points compared to theVolga Breakeven (or Convexity) levels of the
June 2013VIX options
79. Dual Strategy Equity Derivatives Fund79
Example 3B – Crash Protection Strategy
Trade
• Buy 2,000 SPX Dec 13 1475 Puts and Sell 1675 Calls vs. 1591 reference
• Sell 2000 SPX Dec 14 1400 Puts and Buy 1750 Calls vs. 1591 reference
• Structure FairValue: 19.6 (Dec 14 Puts over)
• Unwind Date:April 15, 2013
Results
• The fair value of the structure on the unwind date was 18.5
• Net Profit: USD 240,000 on a USD 3.6 Million initial investment (6.6%
return in 2 business days)
