Option trading strategies based on semi-parametric implied volatility surface prediction
We propose constructing a set of trading strategies using predicted option returns for a relatively small forecasting period of ten trading days to form profitable hold-to-expiration, equally weighted, zero-cost portfolios based on 1-month at-the-money call and put options. We use a statistical machine learning procedure based on regression trees to accurately predict future implied volatility surfaces. Such accurate forecasts are needed to obtain reliable option returns used as trading signals in our strategies. We test the performance of the proposed strategies on options on the S&P 100 and on its constituents for the time period between 2002 and 2006: positive annualized returns of up to more than 50% are achieved.
|Date of creation:||Aug 2009|
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- Matthias R. Fengler & Wolfgang K. H�rdle & Enno Mammen, 0. "A semiparametric factor model for implied volatility surface dynamics," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 5(2), pages 189-218.
- Fengler, Matthias R. & Härdle, Wolfgang K. & Villa, Christophe, 2001.
"The dynamics of implied volatilities: A common principal components approach,"
SFB 373 Discussion Papers
2001,38, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Matthias Fengler & Wolfgang Härdle & Christophe Villa, 2003. "The Dynamics of Implied Volatilities: A Common Principal Components Approach," Review of Derivatives Research, Springer, vol. 6(3), pages 179-202, October.
- Goyal, Amit & Saretto, Alessio, 2009. "Cross-section of option returns and volatility," Journal of Financial Economics, Elsevier, vol. 94(2), pages 310-326, November.
- Heston, Steven L & Nandi, Saikat, 2000. "A Closed-Form GARCH Option Valuation Model," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 585-625.
- George Skiadopoulos & Stewart Hodges & Les Clewlow, 2000. "The Dynamics of the S&P 500 Implied Volatility Surface," Review of Derivatives Research, Springer, vol. 3(3), pages 263-282, October.
- Chris Brooks & M. Currim Oozeer, 2002. "Modelling the Implied Volatility of Options on Long Gilt Futures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(1&2), pages 111-137.
- Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
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