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Portfolio Protection Strategies: A study on the protective put and its extensions
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
2018 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesisAlternative title
Strategier för portföljskydd: Protective Put och dess utvidgningar (Swedish)
Abstract [en]

The need among investors to manage volatility has made itself painfully clear over the past century, particularly during sudden crashes and prolonged drawdowns in the global equity markets. This has given rise to a liquid portfolio insurance market in the form of options, as well as attracted the attention of many researchers. Previous literature has, in particular, studied the effectiveness of the widely known protective put strategy, which serially buys a put option to protect a long position in the underlying asset. The results are often uninspiring, pointing towards few, if any, protective benefits with high option premiums as a main concern. This raises the question if there are ways to improve the protective put strategy or if there are any cost-efficient alternatives that provide a relatively be.er protection. This study extends the previous literature by investigating potential improvements and alternatives to the protective put strategy. In particular, three alternative put spread strategies and one collar strategy are constructed. In addition, a modified protective put this introduced to mitigate the path dependency in a rolling protection strategy.

 

The results show that no option-based protection strategy can dominate the other in all market situations. Although reducing the equity position is generally more effective than buying options, we report that a collar strategy that buys 5% OTM put options and sells 5% OTM call options has an attractive risk-reward profile and protection against drawdowns. We also show that the protective put becomes more effective, both in terms of risk-adjusted return and tail protection, for longer maturities.

Abstract [sv]

Hantering av volatilitet i finansiella marknader har under de senaste decennierna visat sig vara nödvändigt för investerare, framför allt i samband med krascher och långdragna nedgångar i de globala aktiemarknaderna. Detta har gett upphov till en likvid derivatmarknad i form av optioner samt väckte intresse för forskning i området. Tidigare studier har i synnerhet undersökt effektiviteten i den välkända protective put-strategin som kombinerar en lång position i underliggande aktie med en put-option. Resultaten är ofta inte tilltalande och visar få fördelar med strategin, där dess höga kostnader lyfts upp som ett stort problem. Således väcks frågan om protective put-strategin kan förbättras eller om det möjligtvis finns några kostnadseffektiva alternativ med relativt bättre säkerhet mot eventuella nedgångar i underliggande. Denna studie utvidgar tidigare forskning i området genom att undersöka förbättringsmöjligheter för och alternativ till protective put-strategin. Särskilt studeras tre olika put spread-strategier och en collar-strategi, samt en modifierad version av protective put som ämnar att minska på vägberoendet i en löpande optionsstrategi.

 

Resultatet från denna studie pekar på att ingen optionsbaserad strategi är universellt bäst. Generellt sett ger en avyttring av delar av aktieinnehavet ett mer effektivt skydd, men vi visar att det finns situationer då en collar-strategi som köper 5 % OTM put-optioner och säljer 5 % OTMcall-optioner har en attraktiv risk-justerad profil och säkerhet mot nedgångar. Vi visar vidare att protective put-strategin blir mer effektiv, både i termer av en risk-justerad avkastning och som säkerhet mot svansrisker, för längre förfallodatum på optionerna.

Place, publisher, year, edition, pages
2018.
Series
TRITA-SCI-GRU ; 2018:303
National Category
Computational Mathematics
Identifiers
URN: urn:nbn:se:kth:diva-231585OAI: oai:DiVA.org:kth-231585DiVA, id: diva2:1229553
Subject / course
Financial Mathematics
Educational program
Master of Science - Applied and Computational Mathematics
Supervisors
Examiners
Available from: 2018-07-01 Created: 2018-07-01 Last updated: 2018-07-01Bibliographically approved

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