Allasso

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𝗛𝗼𝘄 𝗰𝗮𝗻 𝗜 𝗵𝗲𝗱𝗴𝗲 𝘀𝗵𝗼𝗿𝘁 𝗔𝗧𝗠 𝘀𝘁𝗿𝗮𝗱𝗱𝗹𝗲𝘀? At risk of dating myself, not every professional options trader out there has access to the live and accurate portfolio greeks and execution algorithms they need to automatically achieve an optimal delta. At Allasso, we believe in enabling humans in the markets. Below, we compare and combine classic delta-hedging strategies that can be applied by the rest of us. We test our hedge strategies in Brent oil against a short, front month ATM straddle that rolls on a monthly basis. We assume execution at settlement prices, using the actual underlying future. We run this using Allasso’s low-level, iterative Python backtester, Pulse. 𝗪𝗵𝗮𝘁 𝗱𝗲𝗹𝘁𝗮 𝘀𝗵𝗼𝘂𝗹𝗱 𝗜 𝗵𝗲𝗱𝗴𝗲? We’re testing four different measurements of delta: -Black Scholes Delta, settlement IV -Quickdelta, settlement IV -Black Scholes Delta, reduced settlement IV -Quickdelta, reduced settlement IV -Black Scholes Delta, historical mean settlement IV -Quickdelta, historical mean settlement IV 𝗪𝗵𝗲𝗻 𝘀𝗵𝗼𝘂𝗹𝗱 𝗜 𝗵𝗲𝗱𝗴𝗲? We are testing calendar- and delta-limit-based rebalancing of the hedge position -Daily and weekly hedge frequency -Delta limit for options delta 𝗡𝗼 𝗹𝗶𝗺𝗶𝘁𝘀 𝗼𝗻 𝘁𝗿𝗮𝗱𝗶𝗻𝗴 𝗹𝗼𝗴𝗶𝗰 Allasso Pulse is a low-level Python coding environment that users can access via hosted workspaces. It puts no limits on the trading logic and gives full access to market data (i.e., implied vols) and strategy state (i.e., delta) throughout the backtest. Any combination of “what” and “when” can be tested. 𝗛𝗲𝗱𝗴𝗶𝗻𝗴 𝗱𝗮𝗶𝗹𝘆 𝗮𝘁 𝘀𝗲𝘁𝘁𝗹𝗲𝗺𝗲𝗻𝘁—𝘄𝗵𝗶𝗰𝗵 𝗱𝗲𝗹𝘁𝗮 𝗱𝗲𝗳𝗶𝗻𝗶𝘁𝗶𝗼𝗻 𝘄𝗶𝗻𝘀? In 𝗙𝗶𝗴𝘂𝗿𝗲 𝟭, the mean values are simply the arithmetic average of the previous 5 observations, which includes the previous straddle deltas. The implied-volatility-reduced ones are based on the last observed implied volatility, minus a 15% haircut. 𝗘𝘆𝗲𝗯𝗮𝗹𝗹𝗶𝗻𝗴 𝘁𝗵𝗲 𝗶𝗺𝗽𝗮𝗰𝘁 𝗼𝗳 𝗱𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝘁 𝗵𝗲𝗱𝗴𝗶𝗻𝗴 𝗳𝗿𝗲𝗾𝘂𝗲𝗻𝗰𝗶𝗲𝘀 Let’s look at delta-based methods in 𝗙𝗶𝗴𝘂𝗿𝗲 𝟮. Weekly denotes every 5th business day after entry or previous re-hedge. Conditional means whenever the options delta exceeds +- 15% of the initial trade size. 𝗖𝗼𝗺𝗯𝗶𝗻𝗲𝗱 𝗿𝗲𝘀𝘂𝗹𝘁𝘀, 𝘃𝗼𝗹 𝗻𝗼𝗿𝗺𝗮𝗹𝗶𝘀𝗲𝗱 From the ranking of deltas and frequencies, we would expect to see the best hedge performance from daily hedging of mean-based deltas (𝘀𝗲𝗲 𝗙𝗶𝗴𝘂𝗿𝗲 𝟯). 𝗧𝗵𝗲 𝘂𝗽𝘀𝗶𝗱𝗲 𝗼𝗳 𝗵𝗲𝗱𝗴𝗶𝗻𝗴 𝗮 𝗿𝗼𝗹𝗹𝗶𝗻𝗴 𝗮𝘃𝗲𝗿𝗮𝗴𝗲 𝘄𝗶𝗻𝗱𝗼𝘄 𝗼𝗳 𝗱𝗲𝗹𝘁𝗮 Sifting through all results, it's clear that hedging a rolling average window of delta works the best. 𝗙𝗶𝗴𝘂𝗿𝗲 𝟰 shows this in the context of unhedged and standard daily hedge, and not vol-normalised. Even without live greeks and automatic execution, the results are far from bad. See 𝗙𝗶𝗴𝘂𝗿𝗲 𝟱 for a code snippet. Comment 𝗕𝗘𝗧𝗧𝗘𝗥 𝗢𝗣𝗧𝗜𝗢𝗡𝗦 for full HTML and results.