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July 26, 2017  

Options Strategy Hinges on Pricing Model

A fund-management startup is touting an options-trading strategy that employs a novel method for pricing certain types of options.

The New York investment firm, OQS, is an affiliate of financial-technology startup Oquant of Palo Alto, Calif., which claims to have developed a model for calculating the value and volatility of American-style options more quickly and accurately than other approaches. Both businesses are led by data scientist Mo Ali, who previously ran a data-mining firm called Refleco. Oquant has received venture-capital backing from Ashby Monk, a noted Stanford University researcher and well-known financial writer.

Via OQS, Ali aims to launch a volatility-focused hedge fund in the next couple of months with about $100 million. He envisions a portfolio encompassing three strategies: dispersion trading, which seeks to capitalize on mispricings between equity indexes and their underlying stocks; an arbitrage component that exploits pricing differences between indexes and exchange-traded funds; and a third leg focused on futures and options on the CBOE Volatility Index.

Ali believes all three relative-value strategies will gain an edge by employing Oquant’s proprietary algorithm for pricing American-style options, which can be exercised anytime up to and including the expiration date — versus European-style options, which can be exercised only on the expiration date. The standard method for pricing American-style options takes 3-5 seconds and requires substantial computing power. In practice, most investment professionals employ simplified pricing models that produce results more quickly — but are up to 25% less accurate than Oquant’s model, according to Ali.

Oquant originally planned to market its options-pricing technology to brokers and exchanges. But it has since decided to grant exclusive rights to OQS for the purposes of managing its hedge fund.

Oquant’s backers include KD Ventures, a seed-stage venture-capital firm led by Monk and partner Elliott Donnelley, who both also serve as advisors to OQS. In addition to Ali, OQS’ staff includes chief quantitative officer Yuriy Shkolnikov, who is also chief research officer at Oquant. Shkolnikov co-founded Oquant, previously known as Kepler Technologies, and also has worked at Numerix, Penson Financial Services, Millennium Management and Morgan Stanley.

OQS also employs two portfolio managers: Doug Goldberg, who previously worked at proprietary-trading firms Walleye Trading, Bay Hill Capital and Parallax Fund; and Anthony Hozian, who has worked as a portfolio manager at Andrea Everett Trading, Ronin Capital and Jefferies. Myron Wood, an advisor to OQS on trading technology and risk management, is still employed by streaming-music service Pandora, and before that was at Walleye, Belvedere Trading and Buttonwood Group Trading.

While the fund has yet to launch, OQS is showing investors a live trading record for Goldberg, who has been running a book of VIX futures since November 2016. The portfolio has gained 20.5%, with a Sharpe ratio of 1.8.

CORRECTION (8/2/17): This article has been revised. The original version gave an incorrect title for OQS executive Yuriy Shkolnikov. He is the firm’s chief research officer. The article failed to mention that Shkolnikov co-founded OQS affiliate Oquant, previously known as Kepler Technologies. The article also mischaracterized Myron Wood’s role at OQS. Wood, an advisor to the firm, is still employed by streaming-music service Pandora.