IFin Seminar, Paolo Guasoni, Dublin City University "Options Portfolio Optimization with Margin Requirements"

Institute of Finance

Date: 10 March 2022 / 12:25 - 13:40

Speaker: Paolo Guasoni, Dublin City University

Title:      "Options Portfolio Optimization with Margin Requirements"

Date:      10 marzo 2022

Time:      12:25 - 13:40

Room:     A11

Lugano Campus 



We propose a method to maximize the Sharpe ratio from a portfolio of options on the same underlying asset with different strikes, held to their common expiration, and subject to margin requirements, which induce limits on portfolio weights. Without transaction costs, position limits are equivalent to the shrinkage estimation of the covariance matrix, combined with an increase in risk aversion. With transaction costs, the problem has an explicit solution in the small position limit, and in general can be solved numerically. Out of sample, a back test of the model from 1996 to 2017 yields market-neutral Sharpe ratios above 0.75 for S&P 500 options and above 0.5 for Nasdaq 100 options, net of transaction costs and with total options positions below 5% of portfolio value. On average, optimal options portfolios entail short positions in both out-of-the-money calls and puts, resulting in small frequent gains and large rare losses. Overall, options' investors are more akin to insurers than to arbitrageurs.