Construction and Hedging of Equity Index Options Portfolios

Maciej Wysocki () and Robert Ślepaczuk
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Maciej Wysocki: University of Warsaw, Faculty of Economic Sciences, Quantitative Finance Research Group, Department of Quantitative Finance and Machine Learning

No 2024-14, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: 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 system atic 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 heding in 130-minute intervals provided both reliable protection against adverse market movements and a satisfactory returns profile.

Keywords: S&P500 Index options; Option Pricing Models; Black-Scholes-Merton model; Variance-Gamma model; Implied Volatility; Volatility Risk Premium; Volatility Spreads; Dynamic Hedging (search for similar items in EconPapers)
JEL-codes: C14 C4 C45 C53 C58 G13 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2024
New Economics Papers: this item is included in nep-fmk and nep-rmg
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https://www.wne.uw.edu.pl/download_file/4469/0 First version, 2024 (application/pdf)

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Working Paper: Construction and Hedging of Equity Index Options Portfolios (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2024-14

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