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

See all articles by Juliusz Jablecki

Juliusz Jablecki

National Bank of Poland; University of Warsaw - Faculty of Economic Sciences

Ryszard Kokoszczynski

National Bank of Poland; Warsaw University - Dept. of Economics

Paweł Sakowski

University of Warsaw

Robert Ślepaczuk

University of Warsaw - Faculty of Economic Sciences

Piotr Wojcik

University of Warsaw - Faculty of Economic Sciences

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

Jablecki, Juliusz and Jablecki, Juliusz and Kokoszczynski, Ryszard and Kokoszczynski, Ryszard and Sakowski, Paweł and Ślepaczuk, Robert and Wojcik, Piotr, Options Delta Hedging with No Options at All (October 11, 2014). University of Warsaw Faculty of Economic Sciences Working Paper No. 27/2014, Available at SSRN: https://ssrn.com/abstract=2508639 or http://dx.doi.org/10.2139/ssrn.2508639

Juliusz Jablecki

University of Warsaw - Faculty of Economic Sciences ( email )

Dluga Street 44/50
Warsaw, 00-241
Poland

National Bank of Poland ( email )

Warsaw
Poland

Ryszard Kokoszczynski

National Bank of Poland ( email )

Warsaw
Poland
(4822)5854381 (Phone)
(4822)5854374 (Fax)

Warsaw University - Dept. of Economics ( email )

Warsaw, 00-241
Poland
(4822)8314725 (Phone)
(4822)8314752 (Fax)

Paweł Sakowski

University of Warsaw ( email )

Krakowskie Przedmiescie 26/28
Warszawa, Pl-00681
Poland

Robert Ślepaczuk (Contact Author)

University of Warsaw - Faculty of Economic Sciences ( email )

Dluga Street 44/50
Warsaw, 00-241
Poland

Piotr Wojcik

University of Warsaw - Faculty of Economic Sciences ( email )

Dluga Street 44/50
Warsaw, 00-241
Poland

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