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Option Portfolio Strategies: Tools and Methods

In: Capital Market Finance

Author

Listed:
  • Patrice Poncet

    (ESSEC Business School)

  • Roland Portait

    (ESSEC Business School)

Abstract

As standard option pricing models rest on restrictive assumptions. additional tools which mitigate some of their deficiencies and facilitate their application have been developed. The main tools are based on the notion of implied volatility and on the sensitivities of the value of an option to the different model parameters. From a portfolio management perspective, it is useful to distinguish static from dynamic strategies. Section 12.1 presents the main static strategies, which consist in building an initial portfolio left unchanged until it is sold out. Section 12.2 examines the important notions of historical volatility, implied volatility, smile (or skew), and volatility surface. Section 12.3 analyzes the sensitivities of options to the different variables that influence their values. Section 12.4 studies dynamic strategies involving revisions and using these sensitivities as indicators for monitoring.

Suggested Citation

  • Patrice Poncet & Roland Portait, 2022. "Option Portfolio Strategies: Tools and Methods," Springer Texts in Business and Economics, in: Capital Market Finance, chapter 12, pages 453-499, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-84600-8_12
    DOI: 10.1007/978-3-030-84600-8_12
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