Optimizing Delta-Hedging Strategies in the Presence of Transaction Costs
Optimizing Delta-Hedging Strategies in the Presence of Transaction Costs

Author(s): Alp Yıldırım, Juliusz Jabłecki
Subject(s): Financial Markets
Published by: Wydawnictwa Uniwersytetu Warszawskiego
Keywords: Black–Scholes; options; delta hedging; volatility
Summary/Abstract: The article concerns enhancing the efficiency of delta-hedging strategies when the impact of transaction costs is accounted for. It aims to develop the theoretically optimal hedging strategy that minimizes costs while maintaining an effective hedge position and to implement the strategy in a volatility arbitrage setup. The theoretically optimal strategy is designed using Monte Carlo simulations and then tested with real data using S&P 500 options throughout the five-year period of 2019–2023. Our results favour delta hedging using a threshold approach and underscore the notion that while volatility trading is not generally a risk-free trading process, there is 'free lunch' to be had by improving upon the hedging technique.

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