1. The Black–Scholes Option Pricing
Model is not always effective for
equities indexes
Eganov Asset Management Partners
Denis Eganov & Alexander Kurguzkin
www.eampartners.com
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2. Introduction
An idea that is not dangerous is unworthy of being called
an idea at all.
Oscar Wilde
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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
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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
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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
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6. Problem
The first step in solving a problem is to recognize that it
does exist.
Zig Ziglar
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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
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8. Why does the Formula Black-Sholes result in
Losses?
The Black–Scholes 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
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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!
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75
85
95
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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
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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
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11. Decision
You can never solve a problem on the level on which it was
created.
Albert Einstein
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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
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13. Results of Backtesting of our Strategies
We have backtested our option pricing method. The graph
provides a comparison with index S&P500:
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120
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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%
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14. Performance on August 01, 2016
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:
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110
120
130
Jul 2014 Oct 2014 Jan 2015 Apr 2015 July 2015 October 2015 January 2016 Apr 2016 June-16
The performance of EAM Strategies hedge fund:
The annual profitability +14.29%
The maximum drawdown -14.88%
The standard deviation 8.78%
The performance the index S&P500:
The annual profitability +6.99%
The maximum drawdown -9.76%
The standard deviation 3.91%

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
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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
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17. Conclusion
Of course it is just a trifle, but there is nothing as important as
the trifles.
Arthur Conan Doyle
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18. Conclusions
 Using the Black–Scholes 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
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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
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20. Why do you think you are better than the
funds in your asset class?
 Our team doesn’t use the Black–Scholes 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 Black–Scholes 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
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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
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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
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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
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24. Contacts
Thank you for your attention!
If you have any questions ask Denis Eganov
Email: info@eampartners.com
www.eampartners.com
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