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Portfolio selection with options

Author

Listed:
  • Marco Cassader
  • Sergio Ortobelli Lozza

Abstract

We describe an optimization model to evaluate the portfolio performance in the option’s market. Hedgers, managers and investors, in agreement with Markovitz’s theory, aimed at creating a portfolio made up by assets with negative correlation, so as to have a portfolio not linked to the economic cycle. The optimization portfolio problem with contingent claims allows to create wealth also in financial crisis without using short selling, since option returns show a strong negative correlation. The basic idea of this work is using only trading price options, in particular those written on principal stock Indexes, in order to create a diversified portfolio. Thus we propose an ex post analysis over a two-years period using different international portfolio strategies on the derivative market.

Suggested Citation

  • Marco Cassader & Sergio Ortobelli Lozza, 2013. "Portfolio selection with options," Working Papers (2013-) 1303_qum, University of Bergamo, Department of Management, Economics and Quantitative Methods.
    • Handle: RePEc:brg:newwpa:1303_qum
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    File URL: http://aisberg.unibg.it/bitstream/10446/28876/1/wpMEQ_qm_3-2013.pdf
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    References listed on IDEAS

    as
    1. M. B. Haugh & A. W. Lo, 2001. "Asset allocation and derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 45-72.
    2. Topaloglou, Nikolas & Vladimirou, Hercules & Zenios, Stavros A., 2011. "Optimizing international portfolios with options and forwards," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3188-3201.
    3. Steil, Benn, 1993. "Currency Options and the Optimal Hedging of Contingent Foreign Exchange Exposure," Economica, London School of Economics and Political Science, vol. 60(240), pages 413-431, November.
    4. Liu, Jun & Pan, Jun, 2003. "Dynamic derivative strategies," Journal of Financial Economics, Elsevier, vol. 69(3), pages 401-430, September.
    5. Blomvall, Jorgen & Lindberg, Per Olov, 2003. "Back-testing the performance of an actively managed option portfolio at the Swedish Stock Market, 1990-1999," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 1099-1112, April.
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    Cited by:

    1. Xiaoxia Huang & Xuting Wang, 2019. "Portfolio Investment with Options Based on Uncertainty Theory," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 18(03), pages 929-952, May.

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