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    Q3 A Delta Natural Strategy

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    This document summarizes a delta neutral options trading strategy using a portfolio of long call options and short stock positions. It provides the details of constructing the initial portfolio on March 10th, 2020 using 2000 long call contracts and shorting 250 shares. It then describes rebalancing the portfolio on March 17th to be delta neutral by shorting an additional 450 shares. The value of the portfolio is tracked over 14 days, showing a return of 52.45% from rebalancing compared to 12% without rebalancing or 0.02% at the risk-free rate. In the end, it calculates that after factoring in gains, losses and costs, the net profit from rebalancing was $277.55, indicating delta hedging

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    Q3 A Delta Natural Strategy

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    This document summarizes a delta neutral options trading strategy using a portfolio of long call options and short stock positions. It provides the details of constructing the initial portfolio on March 10th, 2020 using 2000 long call contracts and shorting 250 shares. It then describes rebalancing the portfolio on March 17th to be delta neutral by shorting an additional 450 shares. The value of the portfolio is tracked over 14 days, showing a return of 52.45% from rebalancing compared to 12% without rebalancing or 0.02% at the risk-free rate. In the end, it calculates that after factoring in gains, losses and costs, the net profit from rebalancing was $277.55, indicating delta hedging

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    This document summarizes a delta neutral options trading strategy using a portfolio of long call options and short stock positions. It provides the details of constructing the initial portfolio on March 10th, 2020 using 2000 long call contracts and shorting 250 shares. It then describes rebalancing the portfolio on March 17th to be delta neutral by shorting an additional 450 shares. The value of the portfolio is tracked over 14 days, showing a return of 52.45% from rebalancing compared to 12% without rebalancing or 0.02% at the risk-free rate. In the end, it calculates that after factoring in gains, losses and costs, the net profit from rebalancing was $277.55, indicating delta hedging

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    13 views2 pages

    Q3 A Delta Natural Strategy

    Uploaded by

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    This document summarizes a delta neutral options trading strategy using a portfolio of long call options and short stock positions. It provides the details of constructing the initial portfolio on March 10th, 2020 using 2000 long call contracts and shorting 250 shares. It then describes rebalancing the portfolio on March 17th to be delta neutral by shorting an additional 450 shares. The value of the portfolio is tracked over 14 days, showing a return of 52.45% from rebalancing compared to 12% without rebalancing or 0.02% at the risk-free rate. In the end, it calculates that after factoring in gains, losses and costs, the net profit from rebalancing was $277.55, indicating delta hedging

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    Q3 a Delta natural strategy

    Based on the above analysis, we assume that the stock return follows the normal
    distribution, and we select the period from 23 / 03 in 2018 to 09 / 03 in 2020. By multiplying the
    standard deviation of all daily yields by the square root of 365 days, the historical volatility of
    30.74% can be obtained. We can find that the implied volatility of options is lower than the
    historical volatility. This shows that option pricing is too low, we can carry out arbitrage through
    delta neutral portfolio.
    Constructing a delta neutral portfolio at 10/03/2020
    When an option is determined to be undervalued, the long position of call option should be
    taken to make use of the wrong option. In order to keep portfolio delta neutral, a certain number of
    shares must be short to offset the delta caused by long-term call options. We were to long 2000 calls
    (20 contract ), we would be required to short 250 shares.

    Delta per unit Number of units Position


    Short Stocks 2 -250 -250

    Long Calls 0.250 2000 250

    Transaction costs associated with the portfolio include:


    • Brokerage fee of $19.95 for purchase of shares valued between $1000 and $10000
    • Brokerage fee for options up to $10000 $34.95
    • The settlement fee for each transaction contract is $0.13 per contract
    The value of the portfolio is:
    V0 = 2,000*0.003718+250*4.45
    less transaction costs : $0.13*20 + 34.95+19.95
    V0 = $1062.44
    Rebalancing the portfolio at 17/03/2020
    The decision to rebalance the portfolio on March 17, 2020 was made because it was the
    most recent exercise date. At this time, the increment of options increases to 0.35.

    Rebalancing at 17/3/20
    Number of
    Delta per unit units Position
    Short Stocks 2 -250 -250

    Long Calls 0.3532 2000 700

    +450
    Therefore, we must short an additional 450 shares in order to rebalance our portfolio to be
    delta neutral.
    V7 = 2,000*0.006522+700*2.86
    less transaction costs : 19.95
    V7 = $1995.09
    The value of the portfolio after 14 days was:
    V14 = 2,000*0.008848+700*3.27
    V14= $2306.70

    Q4 Performance evaluation
    In order to benchmark our returns, the risk-free interest rate will be used to calculate the
    return on the initial investment. Cash rate can use the 0.25% published by Reserve Bank of
    Australia. The following table shows the value of the portfolio over two weeks and under different
    conditions. The value of the portfolio already includes the associated transaction costs.

    Return
    (no Return
    Risk free rate Return (rf) No Balance balance) Rebalanced (rebalance)
    10/03/2020 $1062.44 NA $ 1062.44 NA $ 1062.44 NA

    17/03/2020 $1995.09 0.02% $ 2234.50 12.00% $ 1619.69 52.45%


    25/03/2020 $2306.70 0.02% $ 2583.50 15.61% $ 2438.10 17.11%

    Net profit of Rebalanced Portfolio


    Through the new value of the call on 25/3/2020, We lose (2000 * 0.88) = $176 from long
    the calls. But we make a profile of $4.45 - $3.27 = $1.18 * 450 = $531 from the increase in value of
    the share. After factoring in transaction costs ($57.5 + $19.95) = $77.45. We earn a net profile of
    $531 - $176 - $77.45 = $277.55. This indicates that delta hedging strategies may obtain abnormal
    returns.

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