+(+
2
2
)()
d2 = d1 -
To use the Black Scholes evaluation we need five parameters of which 3 are found in the
market: the spot price, the exercise price and time to maturity. The other two, the annual interest
rate volatility respectively, must be estimated. Interest rate is commonly used yield to maturity of
bonds issued by state (zero-coupon bonds), for the same duration (maturity) as the derivative
asset.
Step1 .In oder to obtain the 5
th
parameter, that is volatility, we used the implied volatility
method. It has been shown that the use of implied volatility substantially reduce the number of
required data and has improved performance models. In our analysis we use implied volatility
resulting from the Black Scholes formula by inverting and equalizing with options market price.
C = SN(d
1
) K e
-r(T-t)
N(d
2
)
P = K e
-r(T-t)
N(-d
2
) - SN(-d
1
)
Where,
S Underlying Asset Price
K Strike Price
r Free risk interest rate
Anual volatility
T-t no of days until due date
N Cumulated probability
Thus we obtained the following results:
Tabel 2
Volatilitatea implicit calculat cu modelul Black-Scholes
Optiuni Call Optiuni Put
Moneyness Zile pana la scadenta Zile pana la scadenta
S/K <60 60-180 >180 <60 60-180 >180
<0.94 26,52% 22,22% 20,94% 36,20% 31,83% 29,53%
0.94 - 0.97 24,82% 21,05% 18,48% 28,78% 26,01% 27,42%
0.97 - 1.03 24,05% 21,18% 18,28% 30,34% 26,97% 28,23%
1.03 - 1.06 25,29% 20,98% 16,60% 34,84% 29,52% 31,04%
>1.06 39,03% 20,84% 13,54% 34,61% 34,05% 36,24%
Volatilitatea implicit este obinut prin inversarea formulei de evaluare Black Scholes i egalarea ei cu preul pieei.
Datele reprezint medii ale volatilitailor n funcie de moneyness i de timpul pn la maturitate.
Step2. The following step was to calculate and present a procedure for minimizing errors
Black Scholes model and then we apply this procedure successively separate on implied
volatility for CALL and PUT options. Having the volatility has chosen a single value that
minimizes errors in the evaluation of the Black - Scholes. Errors are defined as the difference
between the option price calculated theoretically from the model, and the market price of the
option.
The procedure to minimize Black Scholes errors :
Applying this procedure on all data to get a fairly accurate assessment of the performance
evaluation of the chosen model. Per total, the two years of analysis have 462 trading days.
After applying this procedure on the database described above we obtained the following:
= [ (
=
(
()
)
]
Call Options
min
= 9.61%;
max
= 21.04%
Errors average that result from the analysis is SEcall = 12326.17 for all call option.
The model tends to overestimate OTM options (outside money) and to underestimate the options
ITM (in the money).
Put options
Chart within the paper shows that valuation errors are quite large especially DITM and
ATM options. The best assess OTM options.
mIn
= 15.49%
max
= 26.30%
Errors average:
SE
put
= 13,279.79
Step3. Test the efficiency of the strategies chosen.
Covered CALL Strategy
Covered Call strategy results:
Covered Put Strategy
Covered Put strategy results:
Step 4. The final step of this paper was to evaluate the cost of these 2 types of strategies.
In order to do that we calculated the net results: one without the strategy and other with
strategy for both Covered Call and Covered Put strategies.
The methodology for this cost calculation is more detailed in the paper, thus here will be
presented only the results
Hedging Call Results:
As recommended daily share price over the strike price, the net result is negative and less
without strategy than using the Covered Call strategy in all 15 cases.
Regarding the effectiveness of the strategy notes that it generated profits in all cases
except the ATM option with maturity over 180 days, while confirming the results obtained in our
empirical analysis in section 3.
According tunes, the net results were lower than the premiums received initial value
generally determined strategies as having the smallest errors preserving the best first initial
charging
Hedging Put Results:
Moneyness/
Zile pana la
scadenta
Cu strategie Fara strategie Cu strategie Fara strategie Cu strategie Fara strategie
<0.94 19.24 -401.81 72.40 -636.80 55.61 -366.87
0.94 - 0.97 38.29 -505.54 123.93 -741.23 164.32 -558.01
0.97 - 1.03 29.98 -576.07 190.03 -759.60 -10.30 -623.57
1.03 - 1.06 257.86 -611.38 290.07 -850.86 249.40 -684.03
>1.06 373.78 -635.64 431.76 -887.45 376.19 -713.98
Rezultate hedging CALL
60 123 182
Moneyness/
Zile pana la
scadenta
Cu strategie Fara strategie Cu strategie Fara strategie Cu strategie Fara strategie
<0.94
189.13 202.20 335.91 346.31 287.86 319.46
0.94 - 0.97
137.72 149.89 218.45 237.96 208.46 218.74
0.97 - 1.03
86.15 96.57 152.90 172.14 128.87 148.54
1.03 - 1.06
48.14 58.05 104.88 116.45 57.15 99.18
>1.06
22.37 32.19 75.98 86.07 -9.80 64.10
Rezultate hedging PUT
60 123 182
Recommended daily share price over the strike price, the net result is no greater without
strategy than using Covered Put strategy in all 15 cases.
Regarding the effectiveness of the strategy notes that it generated profits in all cases
except DOTM type option with maturity over 180 days, while confirming the results obtained in
our empirical analysis in section 3.
According tunes, the net results were lower than the premiums received initial value
generally determined strategies as having the smallest error preserving also received best original
first.
The results reflected lower net cost strategy, that is why results without strategy
in the case of non-exercise are better.
Conclusions
In this paper, we test the performance of dynamic hedging strategies with daily and
weekly rebalancing of put and call options contracts having as underlying asset - Erste share for
a period of two years using a number of 34457 intra-day data.
For the evaluation methodology was used options contracts Black - Scholes model
strategies used to test the performance Covered Call and Covered Put.
Necessary to estimate volatility implied volatility method was performed, the results of
calculations are presented along the paper.
Based on the analyzed performed I noticed that Black Scholes model tends to
overestimate and underestimate OTM options ITM options, and this is very evident in the case of
our test call options. Put option valuation errors were significantly higher (almost double), large
deviations recorded most DITM and ATM options, which are heavily undervalued.
Regarding the performance of dynamic hedging strategies Covered Call found that the
most effective strategies are for DOTM and OTM options with a maturity of 180 days, the
biggest errors recorded in general for ATM options .If Covered Put strategy, the most effective
strategies were DOTM and OTM with a maturity less than 60 days. The largest error recorded
for DOTM and OTM options with maturity greater than 180 days.
Practical assessment strategies largely confirmed the empirical results described above.
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