Model for constructing an option’s portfolio with a certain payoff function

Abstract

The portfolio optimization problem is a basic problem of financial analysis. In the study, an optimization model for constructing an option's portfolio with a certain payoff function has been proposed. The model is formulated as an integer linear programming problem and includes an objective payoff function and a system of constraints. In order to demonstrate the performance of the proposed model, we have constructed the portfolio on the European call and put options of Taiwan Futures Exchange. The optimum solution was obtained using the MATLAB software. Our approach is quite general and has the potential to design option's portfolios on financial markets.

The Scenario-Based Approach to Trade in Option Contracts

“…strategic planning and risk analysis [1][2][3], management and portfolio investment, financial mathematics [4,5]. This research continues the previous studies [6,7] which constructed complex portfolios of stock options [8,9]. The key idea behind the studies was to address issues of linear programming and measure the optimal number of assets.…”

“…We are going to assess the model in more detail, conduct a sensitivity analysis of the value and check the liquidity of the resultant strike prices. Whereas this research continues the studies of other authors [6,7], we choose the price for options in RTS futures contracts as the underlying asset.…”

“…Continuing the research indicated herein [6,7], we focus on the following task. We need to make a financial portfolio of call options contracts for short-term investment of monetary funds.…”

“…In this case, at the first step the scenario tree should be constructed to show how the price for the underlying asset changes. The second step is about the optimization [6,7].…”

Option Portfolio Selection with Generalized Entropic Portfolio Optimization

“…In a continuous time regime-switching market, Fu (2014) [ 16 ] introduced a functional operator to maximize the expected utility of the terminal wealth of a portfolio that contains an option, an underlying stock and a risk-free bond. Fatyanova (2017) [ 17 ] developed a constrained optimization problem for constructing an option portfolio that maximizes a certain payoff function. Faias (2017) [ 18 ] also noted that traditional portfolio optimization methods like mean-variance optimization are not suitable for option portfolios due to non-normality and difficulty estimating distribution of returns, then introduced a short-term view objective function used to optimize portfolios of European options mainly by exploiting mispricing between options.…”