Study Of Option-style Trading Strategies On Chinese Futures Market

Option is a financial derivative tool which can give holders a right to buy or sell the underlying asset within a specified time at a specified price. One of the fundamental differences between futures and options is that a futures buyer must fulfill the contract, but the option buyer can choose to perform the contract or not. The basic function of the futures market is to hedge the market risk, which also required options to hedge. As the futures market has bigger risk compared with the spot market, a strategy which can effectively control loss is particularly in demand. And comprehensively considering Sharp ratio and maximum withdrawal strategy evaluation index, we need a product with limited risk and unlimited profit in the asset management business. Meanwhile the four futures exchanges in China have made significant progress in the listing preparation of option, and the trading simulation of option is going on. Considering the above three points, we need to construct trading strategies suitable for China’s futures market using the thought of option construction. This paper has great theoretical and practical significance.Because the option trading has not yet carried out in our country’s futures exchanges, this paper considers the use of option trading strategies in the futures markets. The so-called option trading strategy is a kind of strategy which will make the payment finally like options, or use the option theory and has the characteristics of options, in order to gain unlimited profit with limited risks.This paper demonstrates three kinds of investment strategies as options, which is, the portfolio insurance strategy, the option replication strategy and the options related variables as the threshold strategy. The portfolio insurance strategy is to use the portfolio insurance idea to construct a late return option product. And the empirical results show that portfolio insurance strategies have more limitations when applied in the futures market than in securities market. The option replication strategy is a dynamic strategy which use futures and risk free assets. This paper obtains the portfolio strategy whose final return is similar with options by replicating Delta of options. And further this paper uses the option replication strategy to make empirical analysis for the simulating assets and closing price in China’s futures market. The theoretical analysis of the options related variables as the threshold strategy is that futures and options have a high degree of correlation. So we use the theoretical value, the likelihood ratio and other parameters calculated from the option pricing formula to construct a new set of futures trading strategies whose final return resemble options. The main innovation of this paper lies in the construction of two kinds of option-type tradingstrategies. They respectively are strategies based on the option value and strategies based on likelihood ratio. Through the empirical analysis of the three kinds of futures investment strategies presented in this paper, we can get the following conclusions. First, the replication option strategy is better than that of portfolio insurance strategy when applied to the futures market of our country. Second, the Delta hedge strategy is effective to hedge the risk of options whose underlying assets are stocks or futures. Third, as options are highly correlated to futures, it is feasible to use options’ value and the exercising probability to guide future investment.