Option Portfolio Strategies: Tools and Methods

Patrice Poncet () and Roland Portait
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Patrice Poncet: ESSEC Business School
Roland Portait: ESSEC Business School

Chapter 12 in Capital Market Finance, 2022, pp 453-499 from Springer

Abstract: Abstract As standard option pricing models rest on restrictive assumptions. additional tools which mitigate some of their deficiencies and facilitate their application have been developed. The main tools are based on the notion of implied volatility and on the sensitivities of the value of an option to the different model parameters. From a portfolio management perspective, it is useful to distinguish static from dynamic strategies. Section 12.1 presents the main static strategies, which consist in building an initial portfolio left unchanged until it is sold out. Section 12.2 examines the important notions of historical volatility, implied volatility, smile (or skew), and volatility surface. Section 12.3 analyzes the sensitivities of options to the different variables that influence their values. Section 12.4 studies dynamic strategies involving revisions and using these sensitivities as indicators for monitoring.

Date: 2022
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DOI: 10.1007/978-3-030-84600-8_12

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