Journal of Investment Strategies

Risk.net

Enhancing enterprise value by trading options

Dilip B. Madan and Yazid M. Sharaiha

Investment activities are enhanced by a regular positioning in options. Results are presented for the Standard & Poor’s 500 index as the underlying asset. Two base activities, long the index and a dynamic portfolio periodically rebalanced to a 60% equity stake, are considered for enhancement. In each case periodic targets that may involve untraded strikes are formulated. Option positions are sought in traded strikes with a view toward minimizing the capital charge for the risk remaining after the hedge. The capital charge is based on the bid–ask spread of a two-price economy. Stress levels implicit in the two prices are taken to be consistent with risk-neutral valuations falling within the spread. New positions always take account of legacy holdings from previous actions, and all open positions are marked-to-market and delta- hedged. The option-enhanced businesses are valued using required returns, reflecting premiums for down- and upside risk charges as embedded in the bid and ask prices of the two-price economies. Option positioning is observed to add market value.

To continue reading...

You must be signed in to use this feature.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: