The Investment Strategy On Option-implied Risk Aversion Estimate

With the introduction of the 50 ETF options Shanghai Stock Exchange, and the coming of stock index options China Financial Futures Exchange and other options, domestic investors gradually update the investment philosophy. Options investment strategies catch interest and researching, some of them have been applied to the actual operation.Options investment strategies generally are divided into speculative investment strategies, arbitrage strategies and hedging strategies. Speculative strategies include directional trading strategies, volatility trading strategies, high-frequency trend trading strategies and so on.Currently, the main investor in mature involved, they widespread use arbitrage strategies. Arbitrage between options and spot, investors need to have a certain dynamic replication capacity of options; call options, put options and spot parity arbitrage(convertible arbitrage), it's risk-free arbitrage; options arbitrage strategies with the view of market trends: including saddle portfolio arbitrage, straddle portfolio arbitrage, vertical portfolio arbitrage, horizontal portfolio arbitrage, butterfly portfolio arbitrage and so on, such arbitrage strategies based on certain market judgment, it's not risk-free strategy.Options investment strategies applied the basic functions of as investment tools and market risks management. Price discovery function is also the basic function of options, widely used in the underlying asset investment strategies.In this paper, we take currency options as example, select the main foreign exchange currencies(G10 currencies), and quantitatively analyze the 7 days currency options in one year, to calculate the investors' risk aversion estimation of every corresponding currency. Then take it as a benchmark, sort the currencies, design the foreign exchange portfolio and investment strategy of the current period.Estimate the risk-neutral probability density function from the cross-sections data of the currency options, and then use a utility function to adjust the probability density function, and obtain currency options implied risk aversion estimation.Test the investment strategy, to detect whether the risk aversion estimation get a risk premium on the market, and to analyze the advantages and disadvantages of the practice level.