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3275. Creating Optimal Speculative Portfolios for 0-DTE (Zero-Days-To-Expire) SPY Options
Invited abstract in session TC-63: Advanced Options Strategies Using O.R. and Machine Learning, stream OR in Banking, Finance and Insurance: New Tools for Risk Management.
Tuesday, 12:30-14:00Room: S14 (building: 101)
Authors (first author is the speaker)
1. | Yusufcan Ozkan
|
R&D, Riskoptima Wealth Tech Corp. | |
2. | Ilkay Boduroglu
|
R&D, Riskoptima Wealth Tech Corp. |
Abstract
The daily notional volume of 0-DTE SPY options is over 1 billion USD. We created an Integer LP model to take advantage of this market every day. Our out-of-sample backtests produce Sharpe ratios that exceed 3. We include commissions, slippage, and the margin requirement, without which the results would have been unrealistic.
Our model, similar to Papahristodoulou’s (2003), is formulated so that the model’s optimal solution will determine the optimal speculative portfolio. The integer decision variables are the quantities of available 1-DTE SPY options contracts. We assume we can trade these quantities a very short time before the closing bell, the day before the expiration date. So, technically, we trade 0-DTE SPY options contracts. In the future, we shall experiment with SPX options, which are cash-settled, unlike SPY options.
We use constraints that limit all significant portfolio Greeks, delta, gamma, theta, rho, and vega. Since there is only one underlying instrument, SPY, and one specific expiration date, all Greeks are additive in each portfolio. Our objective function maximizes the sum of differences between theoretical prices and market prices of available options, net of commissions and slippage. We compute theoretical prices as in Papahristodoulou (2003). The gist of our paper is the way we calculate the theoretical prices of options and the validity of this computation.
Keywords
- Financial Modelling
- Optimization in Financial Mathematics
- Programming, Integer
Status: accepted
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