Design and Back-Testing of a Systematic Delta-Hedging Strategy in FX Options Space
21 Pages Posted: 23 May 2016
Valery Sorokin
Independent
Date Written: May 17, 2016
Abstract
This paper describes design and back-testing of an automated delta-hedging strategy applied to short-dated fx options (specifically – weekly and monthly at-the-money EURUSD straddles).
The results indicate that systematic sale of options that are delta-hedged according to the suggested algorithm generates financial gain for the seller with an attractive Sharpe ratio exceeding 3.0 on after-cost basis (back-testing accounts for volatility bid-offer as well as spot market bid-offer).
For weekly options Sharpe ratio significantly depends on the day of week on which the algorithm systematically sells options: delta-hedging of options sold on Thursdays results in highest Sharpe ratio; delta-hedging of options sold on Fridays results in second-best Sharpe ratio.
The performance of the algorithmic strategy is not correlated with linear changes in spot price which is in line with Black-Scholes theory.
The proposed algorithmic strategy has just a few parameters which serves as a natural protection against over-fitting bias. Further fine-tuning of the algorithm requires access to historical data over longer period and/or access to live trading environment.
https://deliverypdf.ssrn.com/delive...15119022092019071031127000&EXT=pdf&INDEX=TRUE
21 Pages Posted: 23 May 2016
Valery Sorokin
Independent
Date Written: May 17, 2016
Abstract
This paper describes design and back-testing of an automated delta-hedging strategy applied to short-dated fx options (specifically – weekly and monthly at-the-money EURUSD straddles).
The results indicate that systematic sale of options that are delta-hedged according to the suggested algorithm generates financial gain for the seller with an attractive Sharpe ratio exceeding 3.0 on after-cost basis (back-testing accounts for volatility bid-offer as well as spot market bid-offer).
For weekly options Sharpe ratio significantly depends on the day of week on which the algorithm systematically sells options: delta-hedging of options sold on Thursdays results in highest Sharpe ratio; delta-hedging of options sold on Fridays results in second-best Sharpe ratio.
The performance of the algorithmic strategy is not correlated with linear changes in spot price which is in line with Black-Scholes theory.
The proposed algorithmic strategy has just a few parameters which serves as a natural protection against over-fitting bias. Further fine-tuning of the algorithm requires access to historical data over longer period and/or access to live trading environment.
https://deliverypdf.ssrn.com/delive...15119022092019071031127000&EXT=pdf&INDEX=TRUE
