Managing the equity risk using Short Put Ladder strategy by barrier options

  • Received October 21, 2019;
    Accepted November 20, 2019;
    Published December 3, 2019
  • Author(s)
  • DOI
  • Article Info
    Volume 16 2019, Issue #4, pp. 133-145
  • Cited by
    2 articles

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This work is licensed under a Creative Commons Attribution 4.0 International License

The main aim of the paper is to measure hedging efficiency using the Short Put Ladder strategy formed by barrier options in the equity market. The researchers hedge full protection against price’s drop, combining the European down and knock-in put options with the lowest exercise price and vanilla or barrier put options with the higher exercise prices. The authors chose the analyzed alternatives according to the requirement of the zero-cost strategy. The aim of the investigated hedging variants is to secure the minimum constant selling price for the underlying asset’s price drop. Theoretical results of this approach were applied in the equity market, i.e., SPDR S&P 500 ETF. The authors analyzed and compared all hedging variants to each other, however, only the selected techniques were presented in the paper. The findings reveal that the barrier options used for managing the equity risk produce significant reductions of that risk. The right combination of options with the strike prices and the barrier levels wisely selected plays a significant role in risk elimination. Finally, according to the findings, the recommendations for potential investors are introduced.

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    • Figure 1. Comparison of the variants 1A and 1B with the unsecured position
    • Figure 2. Comparison of the selected analyzed hedging techniques
    • Table 1. Put barrier options
    • Table 2. Final hedged selling prices using Short Put Ladder option strategy_1
    • Table 3. Final hedged selling prices using Short Put Ladder option strategy_2A
    • Table 4. Final hedged selling prices using Short Put Ladder option strategy_3
    • Table 5. Final hedged selling prices using Short Put Ladder option strategy_4
    • Table 6. Key hedging information
    • Table 7. European put/put barrier option premiums with barrier levels 240 and 330 on August 3, 2018
    • Table 8. Final selling prices using Short Put Ladder option strategy_1A
    • Table 9. Parameters of analyzed hedging variants with barrier options
    • Table 10. Comparison of the hedging techniques 2A, 3A – 3B and 4A – 4B
    • Table 11. An overview of the results from our analysis