Options Portfolio Selection

23 Pages Posted: 28 Nov 2017 Last revised: 19 Sep 2018

See all articles by Paolo Guasoni

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences

Eberhard Mayerhofer

University of Limerick - Department of Mathematics and Statistics

Date Written: November 23, 2017

Abstract

We develop a new method to optimize portfolios of options in a market where European calls and puts are available with many exercise prices for each of several potentially correlated underlying assets. We identify the combination of asset-specific option payoffs that maximizes the Sharpe ratio of the overall portfolio: such payoffs are the unique solution to a system of integral equations, which reduce to a linear matrix equation under suitable representations of the underlying probabilities. Even when implied volatilities are all higher than historical volatilities, it can be optimal to sell options on some assets while buying options on others, as hedging demand outweighs demand for asset-specific returns.

Keywords: options, portfolio choice, Sharpe ratio, duality, multiple assets

JEL Classification: G11, G12

Suggested Citation

Guasoni, Paolo and Mayerhofer, Eberhard, Options Portfolio Selection (November 23, 2017). Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 18-9. Available at SSRN: https://ssrn.com/abstract=3075945 or http://dx.doi.org/10.2139/ssrn.3075945

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

Eberhard Mayerhofer

University of Limerick - Department of Mathematics and Statistics ( email )

Castletroy, Co
Limerick
Ireland

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