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Enhance and Protect Portfolio Returns: A Dynamic Put Spread Optimization

Author

Listed:
  • Maria Elena De Giuli
  • Dennis Montagna
  • Federica Naldi
  • Alessandra Tanda

Abstract

The aim of this paper is to structure and optimize a dynamic put spread strategy to build an enhancement and protection portfolio. To implement the investment strategy a short put option acting as enhancement and a long put option providing protection are combined- the resulting put spread is modeled, thus assuming a dynamic configuration, depending on market conditions. The investment parameters and objectives are then translated into a proper optimization algorithm. The optimization procedure is implemented and backtested on S&P500 Index as the underlying asset, and it shows that the algorithm actually results in an optimal configuration of the final put spread. The backtest additionally exhibits that the optimized strategy provides an overall over-performance with respect to the underlying asset. The paper presents a novel approach when implementing put spread strategy to enhance and protect portfolio by explicitly modeling the implied volatility and volatility skew, and dynamically adjusting the portfolio depending on market conditions.

Suggested Citation

  • Maria Elena De Giuli & Dennis Montagna & Federica Naldi & Alessandra Tanda, 2019. "Enhance and Protect Portfolio Returns: A Dynamic Put Spread Optimization," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(12), pages 1-66, December.
    • Handle: RePEc:ibn:ijefaa:v:11:y:2019:i:12:p:66
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    References listed on IDEAS

    as
    1. Alan Moreira & Tyler Muir, 2016. "Volatility Managed Portfolios," NBER Working Papers 22208, National Bureau of Economic Research, Inc.
    2. Wolfgang Polasek & Momtchil Pojarliev, 2004. "Global European portfolio construction: Does a changing volatility structure matter?," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 20(3), pages 265-280, July.
    3. Mauricio Diaz & Roy H. Kwon, 2019. "Portfolio optimization with covered calls," Journal of Asset Management, Palgrave Macmillan, vol. 20(1), pages 38-53, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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