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An Optimal Timing Approach to Option Portfolio Risk Management

In: Advances in Financial Risk Management

Author

Listed:
  • Tim Leung
  • Peng Liu

Abstract

Options are widely used as a tool for investment and risk management. In a liquid market, investors have the flexibility to trade options prior to their expiration dates. This is especially important for investors with an existing option position as they can control risk exposure through timing the option trades. For effective option based portfolio management, it is imperative for any investor to determine when to liquidate an option to the market at its trading price. Prior to expiration, the investor can always sell the option immediately, or wait for a potentially better future opportunity. This chapter studies the optimal timing to liquidate an option position to the market.

Suggested Citation

  • Tim Leung & Peng Liu, 2013. "An Optimal Timing Approach to Option Portfolio Risk Management," Palgrave Macmillan Books, in: Jonathan A. Batten & Peter MacKay & Niklas Wagner (ed.), Advances in Financial Risk Management, chapter 17, pages 391-404, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-02509-8_17
    DOI: 10.1057/9781137025098_17
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    References listed on IDEAS

    as
    1. Tim Leung & Peng Liu, 2012. "Risk Premia And Optimal Liquidation Of Credit Derivatives," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(08), pages 1-34.
    2. Goran Peskir & Farman Samee, 2011. "The British Put Option," Applied Mathematical Finance, Taylor & Francis Journals, vol. 18(6), pages 537-563, April.
    3. Marc Romano & Nizar Touzi, 1997. "Contingent Claims and Market Completeness in a Stochastic Volatility Model," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 399-412, October.
    4. Kristoffer Glover & Goran Peskir & Farman Samee, 2009. "The British Asian Option," Research Paper Series 249, Quantitative Finance Research Centre, University of Technology, Sydney.
    5. Tim Leung & Michael Ludkovski, 2010. "Optimal Timing to Purchase Options," Papers 1008.3650, arXiv.org, revised Apr 2011.
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    Cited by:

    1. Tim Leung & Yoshihiro Shirai, 2015. "Optimal derivative liquidation timing under path-dependent risk penalties," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 1-32.

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