Construction and Hedging of Equity Index Options Portfolios
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arXiv
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| Format: | Preprint |
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2024
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| _version_ | 1866914876928032768 |
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| author | Wysocki, Maciej Ślepaczuk, Robert |
| author_facet | Wysocki, Maciej Ślepaczuk, Robert |
| contents | This research presents a comprehensive evaluation of systematic index option-writing strategies, focusing on S&P500 index options. We compare the performance of hedging strategies using the Black-Scholes-Merton (BSM) model and the Variance-Gamma (VG) model, emphasizing varying moneyness levels and different sizing methods based on delta and the VIX Index. The study employs 1-minute data of S&P500 index options and index quotes spanning from 2018 to 2023. The analysis benchmarks hedged strategies against buy-and-hold and naked option-writing strategies, with a focus on risk-adjusted performance metrics including transaction costs. Portfolio delta approximations are derived using implied volatility for the BSM model and market-calibrated parameters for the VG model. Key findings reveal that systematic option-writing strategies can potentially yield superior returns compared to buy-and-hold benchmarks. The BSM model generally provided better hedging outcomes than the VG model, although the VG model showed profitability in certain naked strategies as a tool for position sizing. In terms of rehedging frequency, we found that intraday hedging in 130-minute intervals provided both reliable protection against adverse market movements and a satisfactory returns profile. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2407_13908 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Construction and Hedging of Equity Index Options Portfolios Wysocki, Maciej Ślepaczuk, Robert Portfolio Management Risk Management Trading and Market Microstructure This research presents a comprehensive evaluation of systematic index option-writing strategies, focusing on S&P500 index options. We compare the performance of hedging strategies using the Black-Scholes-Merton (BSM) model and the Variance-Gamma (VG) model, emphasizing varying moneyness levels and different sizing methods based on delta and the VIX Index. The study employs 1-minute data of S&P500 index options and index quotes spanning from 2018 to 2023. The analysis benchmarks hedged strategies against buy-and-hold and naked option-writing strategies, with a focus on risk-adjusted performance metrics including transaction costs. Portfolio delta approximations are derived using implied volatility for the BSM model and market-calibrated parameters for the VG model. Key findings reveal that systematic option-writing strategies can potentially yield superior returns compared to buy-and-hold benchmarks. The BSM model generally provided better hedging outcomes than the VG model, although the VG model showed profitability in certain naked strategies as a tool for position sizing. In terms of rehedging frequency, we found that intraday hedging in 130-minute intervals provided both reliable protection against adverse market movements and a satisfactory returns profile. |
| title | Construction and Hedging of Equity Index Options Portfolios |
| topic | Portfolio Management Risk Management Trading and Market Microstructure |
| url | https://arxiv.org/abs/2407.13908 |