Construction and Hedging of Equity Index Options Portfolios

Maciej Wysocki and Robert Ślepaczuk

Papers from arXiv.org

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 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.

Date: 2024-07
New Economics Papers: this item is included in nep-fmk and nep-rmg
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http://arxiv.org/pdf/2407.13908 Latest version (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:arx:papers:2407.13908

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