Options delta hedging with no options at all

Juliusz Jabłecki (), Ryszard Kokoszczyński, Pawel Sakowski, Robert Ślepaczuk and Piotr Wójcik
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Juliusz Jabłecki: Faculty of Economic Sciences, University of Warsaw; National Bank of Poland

No 2014-27, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: The adjustment speed of delta hedged options exposure depends on the market realized and implied volatility. We observe that by consistently hedging long and short positions in options we can eventually end up with pure exposure to volatility without any options in the portfolio at all. The results of such arbitrage strategy is based only on speed of adjustment of delta hedged option positions. More specifically, they rely on interrelation between realized volatility levels calculated for various time intervals (from daily to intraday frequency). Theoretical intuition enables us to solve the puzzle of the optimal frequency of hedge adjustment and its influence on hedging efficiency. We present results of a simple hedge strategy based on the consistent hedging of a portfolio of options for various worldwide equity indice

Keywords: options hedging efficiency; optimal hedging frequency; realized and implied volatility; index futures; investment strategies (search for similar items in EconPapers)
JEL-codes: C22 C61 G11 G14 G15 G23 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014
New Economics Papers: this item is included in nep-rmg
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http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP144.pdf First version, 2014 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2014-27

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