IDEAS home Printed from https://ideas.repec.org/a/ibn/ijefaa/v11y2019i12p66.html
   My bibliography  Save this article

Enhance and Protect Portfolio Returns: A Dynamic Put Spread Optimization

Author

Listed:
  • Maria Elena De Giuli
  • Dennis Montagna
  • Federica Naldi
  • Alessandra Tanda

Abstract

The aim of this paper is to structure and optimize a dynamic put spread strategy to build an enhancement and protection portfolio. To implement the investment strategy a short put option acting as enhancement and a long put option providing protection are combined- the resulting put spread is modeled, thus assuming a dynamic configuration, depending on market conditions. The investment parameters and objectives are then translated into a proper optimization algorithm. The optimization procedure is implemented and backtested on S&P500 Index as the underlying asset, and it shows that the algorithm actually results in an optimal configuration of the final put spread. The backtest additionally exhibits that the optimized strategy provides an overall over-performance with respect to the underlying asset. The paper presents a novel approach when implementing put spread strategy to enhance and protect portfolio by explicitly modeling the implied volatility and volatility skew, and dynamically adjusting the portfolio depending on market conditions.

Suggested Citation

  • Maria Elena De Giuli & Dennis Montagna & Federica Naldi & Alessandra Tanda, 2019. "Enhance and Protect Portfolio Returns: A Dynamic Put Spread Optimization," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(12), pages 1-66, December.
    • Handle: RePEc:ibn:ijefaa:v:11:y:2019:i:12:p:66
    as

    Download full text from publisher

    File URL: http://www.ccsenet.org/journal/index.php/ijef/article/download/0/0/41381/42834
    Download Restriction: no
    File URL: http://www.ccsenet.org/journal/index.php/ijef/article/view/0/41381
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Alan Moreira & Tyler Muir, 2016. "Volatility Managed Portfolios," NBER Working Papers 22208, National Bureau of Economic Research, Inc.
    2. Wolfgang Polasek & Momtchil Pojarliev, 2004. "Global European portfolio construction: Does a changing volatility structure matter?," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 20(3), pages 265-280, July.
    3. Mauricio Diaz & Roy H. Kwon, 2019. "Portfolio optimization with covered calls," Journal of Asset Management, Palgrave Macmillan, vol. 20(1), pages 38-53, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jeffrey Hoopes & Patrick Langetieg & Stefan Nagel & Daniel Reck & Joel Slemrod & Bryan Stuart, 2016. "Who Sold During the Crash of 2008-9? Evidence from Tax-Return Data on Daily Sales of Stock," NBER Working Papers 22209, National Bureau of Economic Research, Inc.
    2. Ouatik El-Alaoui, AbdelKader & Ismath Bacha, Obiyathulla & Masih, Mansur & Asutay, Mehmet, 2018. "Does low leverage minimise the impact of financial shocks? New optimisation strategies using Islamic stock screening for European portfolios," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 160-184.
    3. el Alaoui, AbdelKader & Masih, Mansur & Bacha, Obiyathulla & Asutay, Mehmet, 2014. "Leverage, return, volatility and contagion: Evidence from the portfolio framework," MPRA Paper 57726, University Library of Munich, Germany.
    4. Wang, Zijun & Khan, M. Moosa, 2017. "Market states and the risk-return tradeoff," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 314-327.

    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibn:ijefaa:v:11:y:2019:i:12:p:66. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Canadian Center of Science and Education (email available below). General contact details of provider: https://edirc.repec.org/data/cepflch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.