Dynamic Delta Hedging Strategy In China’s Options Market

The development of China’s options market provides good conditions for options strategies.The dynamic Delta hedging strategy in China’s options market is studied and an example of practical strategy is given.Based on the analysis of the derivatives hedging strategy,the principle of Delta hedging based on the directional prediction of the volatility of underlying assets is given.Then we build the Autoregressive Conditional Heteroscedastic class models(ARCH class)and Stochastic Volatility class model(SV class)using the data from china’s market.A comparison among different models is given.Surprisingly we find that the efficiency of the basic model is better than that of extended models like EGARCH,TGARCH,SV-L and SV-M based on leverage effect and models with lagged exogenous variable volume.In addition,each of basic GARCH model and SV model has its own strong points on the directional prediction of volatility.Based on this,a complete design of dynamic Delta hedging strategy is given,and the back test and the out-of-sample application show that the strategy including the weighted rules is more than suitable to china’s market.Furthermore,we can also get positive return when getting transaction costs and loan interest into consideration.Finally,a graphic cumulative P&L and a tabular trading calendar based on the strategy of a specific option contract are given.