Option Portfolio Management in a Risk-Neutral World ()
ABSTRACT
The most commonly used strategy of the speculative investments in options
is a statistical arbitrage between the objective underlying price distribution
which the price is following and the risk-neutral distribution on the basis of
which options were priced. This article investigates an alternative approach
which does not demand these two distributions to be different. Instead, it
uses a periodical roll-over of an investment horizon with including options of
the next expirations in the portfolio. We consider a risk-neutral world where
the real distribution coincides with the risk-neutral distribution as a model of
the market. In such a market, the expected return from investments in any
option portfolio corresponds with the risk-free rate. However, it is possible to
construct and manage the portfolio dynamically in such a way that it provides
higher return with a probability close to unity or lower return (possibly a
large negative return) with a given very low probability. To optimize the
portfolio a stochastic program with the approximative safety-first criterion for
option portfolio was developed along with the corresponding multinomial scenario
tree. The results of the Monte-Carlo simulation of the portfolio management
are presented. The very low probability of loss during option portfolio
management is provided by the strategy with periodical rolling horizon of the
optimization. The developed portfolio management strategy can be used as a
basis for constructing trading strategies for the real option markets.
Share and Cite:
Golembiovsky, D. and Abramov, A. (2018) Option Portfolio Management in a Risk-Neutral World.
Journal of Mathematical Finance,
8, 710-733. doi:
10.4236/jmf.2018.84044.
Cited by
No relevant information.