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Option Strategies with linear programming

Author

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  • Christos Papahristodoulou

    (Mälardalen University, School of Business)

Abstract

In practice, all option strategies are decided in advance, given the investor’s belief of the stock price. In this paper, instead of deciding in advance the most appropriate hedging option strategy, an LP problem is formulated, by considering all significant Greek parameters of the Black-Scholes formula, such as delta, gamma, theta, rho and kappa. The optimal strategy to select will be simply decided by the solution of that model. The LP model is applied to Ericsson’s call and puts options.

Suggested Citation

  • Christos Papahristodoulou, 2005. "Option Strategies with linear programming," Finance 0505005, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0505005
    Note: Type of Document - pdf. Published in European Journal of Operational research 157 (2004) 246-256
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0505/0505005.pdf
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    References listed on IDEAS

    as
    1. 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.
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    Cited by:

    1. Pankaj Sinha & Archit Johar, 2010. "Hedging Greeks for a Portfolio of Options Using Linear and Quadratic Programming," Journal of Prediction Markets, University of Buckingham Press, vol. 4(1), pages 17-26, May.
    2. Pankaj Sinha & Akshay Gupta & Hemant Mudgal, 2010. "Active Hedging Greeks of an Options Portfolio Integrating Churning and Minimization of Cost of Hedging Using Quadratic & Linear Programing," Journal of Prediction Markets, University of Buckingham Press, vol. 4(2), pages 1-14, September.
    3. Gao, Pei-wang, 2009. "Options strategies with the risk adjustment," European Journal of Operational Research, Elsevier, vol. 192(3), pages 975-980, February.

    More about this item

    Keywords

    Finance; option portfolios; Linear programming;

    JEL classification:

    • G - Financial Economics

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