Option-Hedging-Strategy-Modeling-based-on-Time-Value

by Yingxin LIN

Introduce

• Python code for a trading strategy based on time value, which is performed in the SSE 50ETF option market of China.

Strategy

• I apply the time value of options as an indicator, to build a hedging strategy.
• Specifically, I buy option contracts with large time value and sell option contracts with small time value.
• Every month, I construct portfolios on the first trading day, and then I close portfolios on the last trading day.

Returns of the strategy

Fig.1 Cumulative returns of the strategy (compared with SSE 50ETF)

Robust Test & Attribution of Strategy

• I divide options into fair value options and imaginary value options, and back-test the strategy on both of them respectively.
• The division is based on S/K - 1 value (i.g. EPS) of each option.

Fig.2 Price status of options in the sample period

• Comparing Fig.3 and Fig.4 below, I find that the return of the strategy mainly comes from virtual options.

Fig.3 Cumulative returns of strategy applied on the imaginary value options (with different EPS)

Fig.4 Cumulative returns of strategy applied on the imaginary virtual options (with different EPS)

Copyright notice

• AUTHOR: Yingxin LIN
• Company: School of Finance, Central University of Finance and Economics (CUFE)
• Contact: [email protected] or [email protected]
• The copyright belongs to Yingxin LIN , 2021/08/22.

Enjoy（。＾▽＾) ! (...and extend/modify) 😊