IDEAS home Printed from https://ideas.repec.org/p/war/wpaper/2014-27.html
   My bibliography  Save this paper

Options delta hedging with no options at all

Author

Listed:
  • Juliusz Jabłecki

    (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)

  • Ryszard Kokoszczyński

    (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)

  • Paweł Sakowski

    (Faculty of Economic Sciences, University of Warsaw)

  • Robert Ślepaczuk

    (Faculty of Economic Sciences, University of Warsaw; Union Investment TFI S.A.)

  • Piotr Wójcik

    (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

Suggested Citation

  • Juliusz Jabłecki & Ryszard Kokoszczyński & Paweł Sakowski & Robert Ślepaczuk & Piotr Wójcik, 2014. "Options delta hedging with no options at all," Working Papers 2014-27, Faculty of Economic Sciences, University of Warsaw.
    • Handle: RePEc:war:wpaper:2014-27
    as

    Download full text from publisher

    File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP144.pdf
    File Function: First version, 2014
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    4. Hull, John C & White, Alan D, 1987. "The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
    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. René Garcia & Richard Luger & Eric Renault, 2000. "Asymmetric Smiles, Leverage Effects and Structural Parameters," Working Papers 2000-57, Center for Research in Economics and Statistics.
    2. Virmani, Vineet, 2014. "Model Risk in Pricing Path-dependent Derivatives: An Illustration," IIMA Working Papers WP2014-03-22, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Lars Stentoft, 2008. "Option Pricing using Realized Volatility," CREATES Research Papers 2008-13, Department of Economics and Business Economics, Aarhus University.
    4. F. Fornari & A. Mele, 1998. "ARCH Models and Option Pricing : The Continuous Time Connection," THEMA Working Papers 98-30, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    5. Carey, Alexander, 2006. "Path-conditional forward volatility," MPRA Paper 4964, University Library of Munich, Germany.
    6. Chenxu Li, 2016. "Bessel Processes, Stochastic Volatility, And Timer Options," Mathematical Finance, Wiley Blackwell, vol. 26(1), pages 122-148, January.
    7. Zhu, Ke & Ling, Shiqing, 2015. "Model-based pricing for financial derivatives," Journal of Econometrics, Elsevier, vol. 187(2), pages 447-457.
    8. Charles J. Corrado & Tie Su, 1996. "Skewness And Kurtosis In S&P 500 Index Returns Implied By Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, June.
    9. Saeed Marzban & Erick Delage & Jonathan Yumeng Li, 2020. "Equal Risk Pricing and Hedging of Financial Derivatives with Convex Risk Measures," Papers 2002.02876, arXiv.org, revised Sep 2020.
    10. Lin, Zhongguo & Han, Liyan & Li, Wei, 2021. "Option replication with transaction cost under Knightian uncertainty," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 567(C).
    11. René Garcia & Richard Luger & Éric Renault, 2005. "Viewpoint: Option prices, preferences, and state variables," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(1), pages 1-27, February.
    12. Matthias Fengler & Wolfgang Härdle & Enno Mammen, 2005. "A Dynamic Semiparametric Factor Model for Implied Volatility String Dynamics," SFB 649 Discussion Papers SFB649DP2005-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    13. El-Khatib, Youssef & Goutte, Stephane & Makumbe, Zororo S. & Vives, Josep, 2023. "A hybrid stochastic volatility model in a Lévy market," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 220-235.
    14. Falko Baustian & Martin Fencl & Jan Posp'iv{s}il & Vladim'ir v{S}v'igler, 2021. "A note on a PDE approach to option pricing under xVA," Papers 2105.00051, arXiv.org, revised Jul 2021.
    15. Jondeau, Eric & Rockinger, Michael, 2000. "Reading the smile: the message conveyed by methods which infer risk neutral densities," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 885-915, December.
    16. Xun Li & Ping Lin & Xue-Cheng Tai & Jinghui Zhou, 2015. "Pricing Two-asset Options under Exponential L\'evy Model Using a Finite Element Method," Papers 1511.04950, arXiv.org.
    17. Stentoft, Lars, 2011. "American option pricing with discrete and continuous time models: An empirical comparison," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 880-902.
    18. Xavier Calmet & Nathaniel Wiesendanger Shaw, 2019. "An analytical perturbative solution to the Merton Garman model using symmetries," Papers 1909.01413, arXiv.org, revised Jan 2021.
    19. Katarzyna Toporek, 2012. "Simple is better. Empirical comparison of American option valuation methods," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 29.
    20. Mauricio Contreras G. & Roberto Ortiz H, 2021. "Three little arbitrage theorems," Papers 2104.10187, arXiv.org.

    More about this item

    Keywords

    options hedging efficiency; optimal hedging frequency; realized and implied volatility; index futures; investment strategies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:war:wpaper:2014-27. 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: Marcin Bąba (email available below). General contact details of provider: https://edirc.repec.org/data/fesuwpl.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.