Options Delta Hedging with No Options at All
University of Warsaw Faculty of Economic Sciences Working Paper No. 27/2014
29 Pages Posted: 12 Oct 2014
Date Written: October 11, 2014
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 indices.
Keywords: options hedging efficiency, optimal hedging frequency, realized and implied volatility, index futures, investment strategies,
JEL Classification: G11, G14, G15, G23, C61, C22
Suggested Citation: Suggested Citation