Designing Allweather Overlays - Monash
Transcript of Designing Allweather Overlays - Monash
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BNP Paribas Quant Forum
Melbourne 2019
Designing Allweather Overlays
A study on option based systematic strategies
I. Guo and G. Loeper
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Systematic strategies on options
Building blocks: Cumulative profit of selling every day the same option
• given maturity (ex 21bd)
• given strike (relative to the current spot level)
• given notional: an amount in currency, i.e. N(S(T)/S(t)-K)+
• Options are held until maturity
• Not delta hedged
• Mostly unlisted maturities (OTC)
• The price is computed by interpolating implied volatilities of listed maturities
• Input price: daily settlement prices (provided by the exchange)
• Typical strategies:
• long index (SPX)
• short OTM call
• long OTM put
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• Underlying: S&P 500
• Option strikes and types: 80p, 85p, 90p, 95p, 100p, 100c, 101c, 102c, 102.5c, 103c, 104c, 105c, 110c, 120c
• Option maturities: 15bd, 21bd, 42bd, 63bd, 84bd, 126bd, 189bd, 252bd
• Options are held until maturity, no delta hedge
In the following plots, each strategy is normalized by the 1-day 99% VaR.
Systematic strategies on options
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The Benchmark
BNPIFUS index is constructed by rolling the shortest maturity future contract on the S&P 500
The Benchmark is constructed as the aggregate daily relative return of the BNPIFUS index
The Benchmark has a constant $ exposure (no compounding) to be consistent with the options strategies
Compounding can be implemented after combining strategies
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Selling OTM calls
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Selling OTM puts
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Exercise Probabilities
100c 101c 102c 103c 104c 105c 110c 115c 120c
1 15bd 0.6237 0.4893 0.3360 0.1977 0.1100 0.0627 0.0073 0.0020 0.0003
2 21bd 0.6373 0.5317 0.3971 0.2766 0.1677 0.0989 0.0127 0.0023 0.0010
3 42bd 0.6650 0.5903 0.4860 0.4067 0.3202 0.2385 0.0357 0.0077 0.0030
4 63bd 0.6921 0.6386 0.5799 0.5054 0.4251 0.3388 0.0776 0.0176 0.0047
5 84bd 0.7066 0.6537 0.5977 0.5401 0.4780 0.4159 0.1481 0.0430 0.0147
6 126bd 0.7272 0.6996 0.6691 0.6296 0.5801 0.5286 0.2336 0.0935 0.0481
7 189bd 0.7403 0.7233 0.7021 0.6829 0.6628 0.6362 0.4441 0.2042 0.0824
8 252bd 0.7687 0.7474 0.7282 0.7021 0.6851 0.6649 0.5632 0.3467 0.1719
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Exercise Probability
100p 99p 98p 97p 96p 95p 90p 85p 80p
1 15bd 0.3763 0.2740 0.1967 0.1450 0.1040 0.0760 0.0167 0.0070 0.0027
2 21bd 0.3627 0.2806 0.2204 0.1713 0.1326 0.0989 0.0224 0.0104 0.0043
3 42bd 0.3350 0.2721 0.2324 0.1941 0.1628 0.1342 0.0424 0.0185 0.0158
4 63bd 0.3079 0.2683 0.2304 0.2060 0.1806 0.1575 0.0640 0.0285 0.0207
5 84bd 0.2934 0.2590 0.2228 0.1924 0.1733 0.1498 0.0795 0.0396 0.0328
6 126bd 0.2728 0.2503 0.2309 0.2080 0.1841 0.1616 0.0855 0.0481 0.0440
7 189bd 0.2597 0.2420 0.2205 0.2042 0.1872 0.1706 0.1189 0.0853 0.0690
8 252bd 0.2313 0.2121 0.1929 0.1802 0.1734 0.1640 0.1194 0.1013 0.0865
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Rebalancing/Compounding
So far, the strategies presented are not compounded. We examine a few different methods of compounding
• rebalancing periodically (252bd, 63bd or 1bd);
• rebalancing whenever the value of the strategy deviates by a certain percentage (20% or 10%).
• Example covered call [Benchmark] + [103c,15bd].
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Covered call with downside protection: [Benchmark] + [103c,15bd] - [100p,126bd].
Naturally, compounding leads to higher performance in favorable market conditions. However, the differences between
various compounding methods are not large. Going forward, we will simply rebalance every day whenever
compounding is considered.
Rebalancing/Compounding
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Covered-calls with downside protection
Typical strategy:
long the index,
short a call option
long a put option.
Since our building block strategies involves selling options everyday, we look for
Strategy = Benchmark + aC − bP
where
• a, b ∈ 0,0.25,0.5,0.75,1
• C is a strategy that sells an out-of-the-money, short to medium maturity call option everyday
• P is a strategy that sells an out-of-the-money, medium to long maturity put option everyday
We rank strategies according to their non-compounded performance divided by the 1-day 99% VaR.
A variety of other metrics are also displayed.
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Overall Results
Perf(NC)/VaR99_1
Perf(C) Perf(NC) SR(C) SR(NC) Alpha Beta VaR99_1 VaR95_1 VaR99_21 VaR95_21 Std
[102.5c,15bd]*1+[90p,189bd]*-1+[Bench]*1 44.099 1.175 0.83735 0.97991 0.69834 0.023517 0.85749 0.018988 0.011268 0.058344 0.046629 0.0063163
[103c,15bd]*1+[90p,189bd]*-1+[Bench]*1 44.002 1.2062 0.85634 0.96851 0.68761 0.022601 0.86753 0.019462 0.011666 0.060843 0.047418 0.0065605
[103c,15bd]*1+[95p,252bd]*-1+[Bench]*1 43.918 1.0646 0.77665 0.95869 0.69941 0.024135 0.83441 0.017684 0.010331 0.054495 0.037694 0.0058496
[102.5c,15bd]*1+[95p,252bd]*-1+[Bench]*1 43.863 1.0337 0.75766 0.96837 0.70979 0.025154 0.81908 0.017273 0.0099055 0.052221 0.036555 0.0056231
[103c,15bd]*1+[90p,252bd]*-1+[Bench]*1 43.666 1.2004 0.85301 0.96903 0.68862 0.022711 0.86558 0.019535 0.011359 0.059836 0.04447 0.0065254
[102.5c,15bd]*1+[95p,189bd]*-1+[Bench]*1 43.653 1.0085 0.74334 0.96351 0.7102 0.025321 0.81317 0.017028 0.009846 0.053311 0.036911 0.0055136
[103c,15bd]*1+[95p,189bd]*-1+[Bench]*1 43.492 1.039 0.76234 0.95304 0.69925 0.024263 0.82861 0.017528 0.010219 0.055585 0.0376 0.005743
[102.5c,15bd]*1+[90p,252bd]*-1+[Bench]*1 43.399 1.169 0.83401 0.97959 0.6989 0.023618 0.85473 0.019217 0.011162 0.057562 0.042581 0.0062862
[102c,15bd]*1+[95p,252bd]*-1+[Bench]*1 43.364 0.97438 0.72384 0.95613 0.71028 0.025619 0.80093 0.016692 0.0094657 0.050666 0.0348 0.0053684
[103c,15bd]*1+[100p,189bd]*-1+[Bench]*1 43.326 0.84221 0.64686 0.91039 0.69922 0.025713 0.7678 0.01493 0.0082311 0.04854 0.030614 0.0048733
[103c,15bd]*1+[100p,252bd]*-1+[Bench]*1 43.238 0.90912 0.6859 0.9398 0.70904 0.025848 0.78806 0.015863 0.0086744 0.046613 0.030874 0.0050959
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Efficient frontier
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Scatter plots of the performance vs. VaR.
Blue line “Capital market line”
Benchmark = black dot
Efficient frontier
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Efficient frontier
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Efficient frontier
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Top Performers
Compounded performance without any scaling.
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Compounded performance scaled by the 1-day 99% VaR. (=1+(S(T)/S(0)-1)/Var)
Top Performers
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Non-compounded performance scaled by the 1-day 99% VaR.
The performance here is equivalent to our ranking metric.
Top Performers
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Return histograms
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Other VaRs: 21-day 99% VaR
Repeat the coloured scatter plots with variations in VaR choices.
The results are still similar to the 1-day 99% VaR case.
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1-day 95% VaR
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21-days 95% VaR
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Without GFC
Same exercise but starting in 2010 and thus excluding the GFC.
In these market conditions, it is preferable to buy little or no downside protection.
Perf(NC)/VaR99_1
Perf(C) Perf(NC) SR(C) SR(NC) Alpha Beta VaR99_1 VaR95_1 VaR99_21
VaR95_21 Std
[103c,15bd]*1+[100p,126bd]*-0.25+[Bench]*1 41.873 1.2275 0.85824 1.2141 0.84886 0.0062729 0.9821 0.020496 0.012169 0.064947 0.038674 0.0071096
[103c,15bd]*1+[100p,189bd]*-0.25+[Bench]*1 41.784 1.2442 0.86681 1.2189 0.84916 0.0063009 0.98192 0.020745 0.012273 0.066053 0.039526 0.0071781
[104c,21bd]*1+[90p,252bd]*-0.25+[Bench]*1 41.603 1.3868 0.94053 1.2365 0.83857 0.0053123 0.98861 0.022607 0.013442 0.072172 0.046739 0.0078869
[103c,15bd]*1+[95p,63bd]*-0.25+[Bench]*1 41.48 1.3105 0.90096 1.2319 0.84694 0.0059982 0.9853 0.02172 0.012825 0.067502 0.043226 0.0074805
[103c,15bd]*1+[95p,126bd]*-0.25+[Bench]*1 41.454 1.3019 0.89662 1.2298 0.84694 0.0060641 0.98393 0.021629 0.012723 0.067887 0.041332 0.0074444
[103c,15bd]*1+[100p,84bd]*-0.25+[Bench]*1 41.422 1.2103 0.84961 1.2063 0.84677 0.006104 0.98288 0.020511 0.011915 0.063668 0.039091 0.0070555
[103c,15bd]*1+[95p,84bd]*-0.25+[Bench]*1 41.415 1.3028 0.89726 1.228 0.84573 0.0059595 0.98453 0.021665 0.012821 0.067885 0.042533 0.0074603
[104c,15bd]*1+[100p,63bd]*0+[Bench]*1 41.402 1.5932 1.0369 1.3022 0.84749 0.0056557 0.99316 0.025045 0.014312 0.07628 0.051121 0.0086036
[103c,15bd]*1+[95p,252bd]*-0.25+[Bench]*1 41.38 1.3136 0.90246 1.2335 0.84739 0.0060732 0.98433 0.021809 0.012585 0.067825 0.042306 0.0074889
[104c,21bd]*1+[85p,252bd]*-0.25+[Bench]*1 41.35 1.4293 0.96078 1.2516 0.84133 0.0054557 0.98924 0.023235 0.013741 0.073089 0.047503 0.0080303
[104c,21bd]*1+[95p,252bd]*-0.25+[Bench]*1 41.327 1.3346 0.91507 1.219 0.83585 0.0051835 0.98772 0.022142 0.013166 0.070957 0.045783 0.0076984
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Efficient frontier without GFC
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Covered Call Performance Contours across maturities
Strategies of the form 𝐵𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 + 𝑥, 102.5𝑐 − 𝑦, 90𝑝 , with 𝑥 and 𝑦 varying across a range of maturities.
A contour of the Perf/VaR ratio is given below.
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Strategies of the form 𝐵𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 + 𝑥, 15𝑏𝑑 − [𝑦, 189𝑏𝑑], where 𝑥 is a call and 𝑦 is a put, varying across a range of out-of-the-money strikes. Contour of the Perf/VaR ratio.
Covered Call Performance Contours across strikes
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Put vs. Put Spread vs. Put Ratio
Instead of buying a put for downside protection, one could also consider replacing it with a put spread or a put ratio. We effectively exchange some performance (via lower premia) with risk (less downside protection).
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Covered-calls with put spread
Buying 100p, 95p or 90p while selling the 85p of the same maturity at the same quantity.
Perf(NC)/VaR99_1
Perf(C) Perf(NC) SR(C) SR(NC) Alpha Beta VaR99_1 VaR95_1 VaR99_21 VaR95_21 Std
[102.5c,15bd]*1+([100p,63bd]-[85p,63bd])*-0.75+[Bench]*1
36.977 0.97607 0.7578 0.72084 0.55964 0.012811 0.94003 0.020494 0.010376 0.06472 0.037982 0.007133
[102.5c,15bd]*1+([100p,63bd]-[85p,63bd])*-1+[Bench]*1
36.671 0.81737 0.65694 0.68468 0.55029 0.013185 0.89969 0.017914 0.0086946 0.051927 0.029028 0.0062887
[102.5c,15bd]*1+([95p,63bd]-[85p,63bd])*-1+[Bench]*1
36.621 1.0871 0.82653 0.7383 0.56133 0.012631 0.952 0.02257 0.012033 0.067347 0.04956 0.0077566
[103c,15bd]*1+([100p,63bd]-[85p,63bd])*-0.75+[Bench]*1
36.377 1.0039 0.77679 0.71838 0.55585 0.012377 0.94822 0.021354 0.010802 0.065676 0.038944 0.0073616
[103c,15bd]*1+([100p,63bd]-[85p,63bd])*-1+[Bench]*1
36.126 0.84463 0.67593 0.68433 0.54765 0.012712 0.91254 0.01871 0.0091724 0.052883 0.030542 0.0065017
[102c,15bd]*1+([100p,63bd]-[85p,63bd])*-0.75+[Bench]*1
36.091 0.92046 0.72398 0.70438 0.55402 0.012706 0.9296 0.02006 0.010034 0.063747 0.036311 0.0068837
[103c,15bd]*1+([95p,63bd]-[85p,63bd])*-1+[Bench]*1
36.019 1.1149 0.84553 0.73426 0.55684 0.012216 0.95758 0.023474 0.012335 0.069947 0.050788 0.0079988
[102c,15bd]*1+([100p,63bd]-[85p,63bd])*-1+[Bench]*1
35.905 0.76445 0.62312 0.66459 0.54172 0.013037 0.88323 0.017354 0.0082534 0.050954 0.027482 0.0060593
[102c,15bd]*1+([95p,63bd]-[85p,63bd])*-1+[Bench]*1
35.556 1.0302 0.79271 0.72465 0.55761 0.01256 0.94517 0.022295 0.011664 0.064502 0.048108 0.0074888
[104c,15bd]*1+([100p,63bd]-[85p,63bd])*-1+[Bench]*1
35.303 0.83672 0.67881 0.64269 0.52139 0.010623 0.93075 0.019228 0.0095956 0.054571 0.033069 0.0068582
[102.5c,15bd]*1+([100p,84bd]-[85p,84bd])*-0.75+[Bench]*1
35.272 0.9884 0.7699 0.7036 0.54806 0.012015 0.94281 0.021828 0.010763 0.069888 0.043307 0.0074001
10085
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Perf(NC)/VaR99_1
Perf(C) Perf(NC) SR(C) SR(NC) Alpha Beta VaR99_1 VaR95_1 VaR99_21 VaR95_21 Std
[102.5c,15bd]*1+([100p,63bd]-[85p,63bd]*[100p,63bd,stri]/85)*-1+[Bench]*1 36.252 0.86336 0.69193 0.669 0.53616 0.012255 0.90134 0.019087 0.009001 0.0617 0.029473 0.0067982
[103c,15bd]*1+([100p,63bd]-[85p,63bd]*[100p,63bd,stri]/85)*-1+[Bench]*1 36.14 0.89086 0.71093 0.66974 0.53447 0.011852 0.91376 0.019672 0.0094445 0.062656 0.031217 0.007007
[102.5c,15bd]*1+([95p,63bd]-[85p,63bd]*[95p,63bd,stri]/85)*-1+[Bench]*1 35.887 1.1203 0.84986 0.73098 0.55451 0.012168 0.9534 0.023681 0.012381 0.070056 0.050136 0.0080736
[102.5c,15bd]*1+([100p,63bd]-[85p,63bd]*[100p,63bd,stri]/85)*-0.75+[Bench]*1 35.811 1.0119 0.78405 0.70975 0.54995 0.012207 0.93973 0.021894 0.01072 0.07205 0.038517 0.0075101
[103c,15bd]*1+([100p,63bd]-[85p,63bd]*[100p,63bd,stri]/85)*-0.75+[Bench]*1 35.599 1.0399 0.80304 0.70816 0.54688 0.011818 0.94796 0.022558 0.011025 0.073006 0.039346 0.0077352
[103c,15bd]*1+([95p,63bd]-[85p,63bd]*[95p,63bd,stri]/85)*-1+[Bench]*1 35.585 1.1482 0.86885 0.72763 0.55059 0.011786 0.95906 0.024416 0.012696 0.072656 0.051364 0.0083128
[102c,15bd]*1+([95p,63bd]-[85p,63bd]*[95p,63bd,stri]/85)*-1+[Bench]*1 35.303 1.0628 0.81604 0.71689 0.55043 0.012078 0.94642 0.023115 0.011906 0.068686 0.048684 0.0078097
[102.5c,15bd]*1+([100p,84bd]-[85p,84bd]*[100p,84bd,stri]/85)*-0.75+[Bench]*1 35.274 1.0181 0.79411 0.68671 0.53562 0.011209 0.94374 0.022513 0.011066 0.078074 0.043916 0.00781
[103c,15bd]*1+([100p,84bd]-[85p,84bd]*[100p,84bd,stri]/85)*-0.75+[Bench]*1 35.113 1.0458 0.81311 0.68569 0.53312 0.010863 0.95164 0.023157 0.011594 0.07903 0.044745 0.0080344
[102c,15bd]*1+([100p,63bd]-[85p,63bd]*[100p,63bd,stri]/85)*-0.75+[Bench]*1 35.094 0.95561 0.75022 0.69287 0.54395 0.01208 0.92925 0.021377 0.010208 0.071077 0.036854 0.0072654
[102c,15bd]*1+([100p,63bd]-[85p,63bd]*[100p,63bd,stri]/85)*-1+[Bench]*1 35.037 0.80955 0.65811 0.64867 0.52732 0.012077 0.88549 0.018783 0.0084197 0.060727 0.027782 0.0065743
Covered-calls with put ratio
Buying put with strike x while selling the 85p of the same maturity at the quantity of x/85.
10085
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Top Strategies: Compounded no scaling
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Top Strategies: Compounded scaled by 1 day 99% Var
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Top Strategies: Non compounded scaled by 1 day 99% Var
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Sensitivity Regression
We will regress the top covered call strategy, 𝐵𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 + 102.5𝑐, 15𝑏𝑑 − [90𝑝, 189𝑏𝑑],
against the Benchmark and the implied volatility to estimate contributions form various sensitivities.
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Put Strike vs. Put Weight
We examine the effect of buying puts for downside protection, and whether there are any equivalences
between different values of put strikes and put weights.
Combining with index
First, let us look at the case of buying puts along with the Benchmark, and compare the effect this has on the
1-day 99% VaR as well as the Perf/VaR ratio.
Perf(NC)/VaR99_1
Perf(C) Perf(NC) SR(C) SR(NC) Alpha Beta VaR99_1 VaR95_1 VaR99_21 VaR95_21 Std
[85p,126bd]*-1+[Bench]*1 27.105 0.81078 0.72164 0.46395 0.41294 0.002934 0.96671 0.026624 0.016225 0.08612 0.059735 0.0092059
[80p,126bd]*-1+[Bench]*1 26.99 0.88057 0.77826 0.47053 0.41586 0.0029034 0.9757 0.028835 0.017255 0.099332 0.065252 0.0098584
[85p,126bd]*-0.8+[Bench]*1 26.825 0.84006 0.75322 0.45391 0.40699 0.0022164 0.98107 0.028079 0.01696 0.094302 0.064512 0.0097492
[90p,126bd]*-1+[Bench]*1 26.573 0.68346 0.62576 0.43174 0.39529 0.0020933 0.95536 0.023549 0.014838 0.075127 0.05582 0.0083391
[95p,126bd]*-1+[Bench]*1 26.236 0.54189 0.51261 0.3929 0.37168 0.00096585 0.94028 0.019539 0.012524 0.064164 0.048636 0.0072653
[80p,126bd]*-0.8+[Bench]*1 26.22 0.89421 0.79851 0.45791 0.4089 0.0022259 0.98572 0.030454 0.017715 0.10487 0.071777 0.010287
[90p,126bd]*-0.8+[Bench]*1 26.036 0.739 0.67651 0.43078 0.39435 0.0015454 0.97585 0.025983 0.015805 0.081087 0.059332 0.0090368
[95p,126bd]*-0.8+[Bench]*1 25.96 0.62533 0.58599 0.40396 0.37855 0.00068842 0.97004 0.022573 0.013747 0.069581 0.054401 0.0081546
[90p,126bd]*-0.6+[Bench]*1 25.394 0.79115 0.72726 0.42597 0.39157 0.0010705 0.98839 0.02864 0.016691 0.092573 0.066346 0.0097838
[85p,126bd]*-0.6+[Bench]*1 25.389 0.86607 0.78479 0.44173 0.40028 0.0015691 0.99047 0.030911 0.017627 0.10248 0.072953 0.010328
[80p,126bd]*-0.6+[Bench]*1 25.125 0.90533 0.81876 0.444 0.40154 0.0015989 0.99258 0.032588 0.018161 0.11041 0.079022 0.010741
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Combining with covered call
Next, let us look at the case of buying puts along with selling a covered-call, and compare the effect
this has on the 1-day 99% VaR as well as the Perf/VaR ratio.
Perf(NC)/VaR99_1
Perf(C) Perf(NC) SR(C) SR(NC) Alpha Beta VaR99_1 VaR95_1 VaR99_21 VaR95_21 Std
[100p,126bd]*-1+[102.5c,15bd]*1+[Bench]*1 42.932 0.71216 0.56761 0.84392 0.67263 0.025241 0.71739 0.013221 0.0073713 0.041561 0.028741 0.0044453
[90p,126bd]*-1+[102.5c,15bd]*1+[Bench]*1 41.526 1.1039 0.80663 0.9021 0.65917 0.020823 0.86697 0.019425 0.011575 0.06021 0.048206 0.0064463
[95p,126bd]*-1+[102.5c,15bd]*1+[Bench]*1 41.495 0.91195 0.69349 0.87694 0.66686 0.022598 0.81293 0.016713 0.0098166 0.052395 0.037054 0.0054781
[100p,126bd]*-0.8+[102.5c,15bd]*1+[Bench]*1 41.235 0.86589 0.66617 0.86076 0.66222 0.021347 0.85309 0.016156 0.0091588 0.04832 0.033264 0.0052992
[95p,126bd]*-0.8+[102.5c,15bd]*1+[Bench]*1 41.029 1.0307 0.76687 0.87296 0.64949 0.019677 0.88944 0.018691 0.011041 0.057077 0.043795 0.0062198
[85p,126bd]*-1+[102.5c,15bd]*1+[Bench]*1 40.818 1.2776 0.90252 0.9289 0.6562 0.019846 0.90008 0.022111 0.012817 0.069286 0.052763 0.0072452
[90p,126bd]*-0.8+[102.5c,15bd]*1+[Bench]*1 39.928 1.1864 0.85738 0.88666 0.64076 0.018548 0.91371 0.021473 0.012256 0.06561 0.050926 0.0070487
[85p,126bd]*-0.8+[102.5c,15bd]*1+[Bench]*1 39.596 1.3254 0.93409 0.90397 0.6371 0.017917 0.93048 0.023591 0.01358 0.07381 0.054422 0.0077234
[80p,126bd]*-1+[102.5c,15bd]*1+[Bench]*1 39.494 1.3772 0.95913 0.92433 0.64373 0.018525 0.92251 0.024286 0.013866 0.07884 0.055736 0.0078489
[100p,126bd]*-0.6+[102.5c,15bd]*1+[Bench]*1 39.046 1.0211 0.76472 0.84607 0.63362 0.017936 0.92051 0.019585 0.010796 0.055906 0.040033 0.0063577
[95p,126bd]*-0.6+[102.5c,15bd]*1+[Bench]*1 38.63 1.1477 0.84025 0.85352 0.62486 0.01708 0.93326 0.021751 0.012031 0.062474 0.048846 0.0070836
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OTC vs. Listed
Single strategies
Fixing the strike at 102.5c, let us compare the listed 3fripb and 1m3fripb calls with nearby otc calls. Everything is scaled by their respective VaR.
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Similarly let us compare 90p with longer maturities.
OTC vs. Listed
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OTC vs. Listed
maturity
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OTC vs. Listed
Stability of the vega
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OTC vs. Listed
Stability of the delta
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OTC vs. Listed
Single strategies
Zooming on 2008
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Listed covered calls with downside protection
Recall that the top performing OTC strategies had a Perf/VaR ratio of 44.
As shown below, the top performing Listed strategies have a ratio of 36.
Perf(NC)/VaR99_1
Perf(C) Perf(NC) SR(C) SR(NC) Alpha Beta VaR99_1 VaR95_1 VaR99_21 VaR95_21 Std
[105c,1m,3fri,pb]*1+[90p,9m,semester,3fri,pb]*-1+[Bench]*1 36.654 0.86689 0.69011 0.69172 0.55067 0.014734 0.83576 0.018828 0.011404 0.061476 0.043625 0.0066018
[104c,1m,3fri,pb]*1+[90p,9m,semester,3fri,pb]*-1+[Bench]*1 36.483 0.8437 0.67353 0.69519 0.55497 0.015283 0.82411 0.018461 0.010984 0.059961 0.042601 0.0063931
[105c,1m,3fri,pb]*1+[90p,12m,semester,3fri,pb]*-1+[Bench]*1 36.454 0.87216 0.69512 0.68465 0.54567 0.013568 0.87144 0.019068 0.011717 0.061818 0.040856 0.0067105
[104c,1m,3fri,pb]*1+[90p,12m,semester,3fri,pb]*-1+[Bench]*1 36.196 0.84915 0.67853 0.6883 0.55 0.014077 0.86153 0.018746 0.011409 0.060136 0.040028 0.0064988
[105c,1m,3fri,pb]*1+[85p,9m,semester,3fri,pb]*-1+[Bench]*1 36.108 0.97959 0.76401 0.70426 0.54927 0.013946 0.86511 0.021159 0.012813 0.070416 0.049986 0.0073273
[104c,1m,3fri,pb]*1+[95p,9m,semester,3fri,pb]*-1+[Bench]*1 36.08 0.70438 0.58032 0.66439 0.54737 0.015981 0.77485 0.016084 0.009564 0.053939 0.033497 0.0055849
[104c,1m,3fri,pb]*1+[85p,9m,semester,3fri,pb]*-1+[Bench]*1 35.942 0.95627 0.74743 0.70852 0.55378 0.014434 0.85657 0.020796 0.012436 0.068659 0.049202 0.0071098
[105c,1m,3fri,pb]*1+[95p,12m,semester,3fri,pb]*-1+[Bench]*1 35.889 0.76153 0.62054 0.66866 0.54486 0.014252 0.84066 0.01729 0.010468 0.057013 0.036054 0.0059994
[104c,1m,3fri,pb]*1+[85p,12m,semester,3fri,pb]*-1+[Bench]*1 35.822 0.94366 0.7415 0.69671 0.54745 0.013481 0.87976 0.020699 0.012614 0.06632 0.04933 0.007135
[105c,1m,3fri,pb]*1+[95p,9m,semester,3fri,pb]*-1+[Bench]*1 35.776 0.72718 0.5969 0.66305 0.54426 0.015373 0.79211 0.016684 0.0099293 0.055621 0.034684 0.0057773
[105c,1m,3fri,pb]*1+[85p,12m,semester,3fri,pb]*-1+[Bench]*1 35.707 0.96677 0.75808 0.69258 0.54308 0.013022 0.8875 0.021231 0.012873 0.068077 0.050113 0.0073532
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Top listed covered call vs. Top OTC covered call
Let us plot the top listed covered call strategy against the top OTC covered call strategy.
First, we plot the compounded performance without any scaling.
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Compounded performance scaled by the 1-day 99% VaR
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Non-Compounded performance scaled by the 1-day 99% VaR
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Selling options vs. running delta hedge only
Single strategies
First example is [105c, 21bd].
Instead of buying/selling options, another possibility is to run the corresponding delta hedge portfolio. The
difference would mainly come from the difference between the implied vs. realized volatilities.
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Next example is [95p,126bd].
Selling options vs. running delta hedge only
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Covered calls
We can combine the two for a covered call. Since the options are usually more expensive than the delta hedge, we can also try using a true call but protected by a delta hedge only put.
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Conclusions
• Flexible tool to look at a range of possibilities
• For this type of strategies (long index short call long put) better to chose:
• Short maturity slightly otm call
• Longer maturity (6m-1y) close to atm or slightly otm put
• Non-listed maturities (i.e. one expiry every day) allow to benefit more from the short maturity premium
• Ways to cheapen the hedge (put spread, put ratio), but VaR increases
• Efficient frontier analysis shows the benefit of adding options to the portfolio
• Conclusions will always depend on the choice of the performance metric