Analysis Of Option’s Replication Based On B-S Model And Dynamic Delta Adjustment

With the development and opening up of China’s financial market,the domestic capital market is gradually mature and improve,the same as the Chinese investors.But after 20 years of rapid development of the domestic capital market,it is still lost over a hundred-year-old heritage of Western developed financial markets,and with a number of policy interventions with "Chinese characteristics",thus making both listed company and investor’s behavior existed strong irrational factors.The presence of these irrational factors led to the volatility in the A-share market is much higher than the stock markets in the United States,Britain,Hong Kong and other mature financial markets.An important reason for the high rate of the A-share market volatility is the lack of suitable derivatives for volatility arbitrage,in contrast,mature financial market has a good developed derivatives market,the stock options market is particularly well developed,if the volatility of individual stocks appear high,the arbitrageurs can layout stock Long Straddle combination to get the higher volatility of earnings,Under the no-arbitrage pricing theory,the end result of those arbitrageurs’ action is to make the stocks’ volatility return to normal levels,thereby reducing the volatility of the stock market.For the phenomenon that the A-share is still present high volatility,the author designed a trading strategy based on the volatility premium phenomenon to get high return on volatility of the current A-share market.The strategy using stocks and futures’ trading to tracking underlying’s Delta and copy options’ Pay-off structure,thus making it possible to build Long Straddle combination to get volatility premium.The advantages of this strategy are large capital capacity,high return rate and low correlation with the broader market,so this strategy is applied prospect worthy of mining development.The thesis is divided into five parts,the first part is the introduction,description of background and framework articles and related literature review,and the author pointed out possible innovation and shortcomings.The second part describes the principles of replication,starting with the derivation of B-S model,explain the principles of dynamic Delta replication and feasibility of the method is proved mathematically,then using Monte Carlo simulation method to prove copy method in operation viable.The third part explained in detail the steps and details to copy the option,from the perspective of the actual operation,describes the set positions,position adjustment,extension and other key point of practice,and propose possible strategies to optimize programs.The fourth part is the key sections of this paper,this chapter based on real historical data,in the greatest degree of respect for the principles of historical back-testing strategies,and the results were analyzed and interpreted systematically.In the fifth part,the author summarizes the content and results,and recommendations for strategy’s future development.Through theoretical analysis and back test research,the main conclusions of this paper are as follows:1.By copying options to hold A shares’ volatility long position is a profitable strategy in long-term,especially for those small cap stocks.2.40 trading days’ duration and rollover 10 days before expiration date has the best performance when copying options.3.When the stock’s 20 day volatility is under the distribution of the 10% points of this stock’s nearest 1 year volatility performance,it has the highest P&L ratio.