How Useful Is Realized Volatility in Option Trading? – The Case of Taiwan Index Option Market
Date Issued
2009
Date
2009
Author(s)
Luo, Vincent
Abstract
We investigate the usefulness of realized volatility in trading volatility in Taiwan index option market. Instead of using straddle, we use delta neutral portfolio to trade the mispriced volatility. The realized volatility is held constant and used as the input parameter for delta. We choose the sampling frequency to be 25 minutes and find that the strategy could bring positive profit on average. This sampling frequency coincides with the one that is suggested by signature plot as well. Our empirical finding shows that the delta hedging strategy with realized volatility as its parameter outperforms the one with implied volatility in terms of the average profit relative to the standard deviation.
Subjects
option trading
volatility trading
realized volatility
dynamic hedging
Type
thesis
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ntu-98-R96323017-1.pdf
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