Minimum Variance Delta Hedging:An Analysis Basesd On The TXO Market

Risk management is the core component of option portfolio management.Greeks,such as delta,gamma,vega and theta,is the common option risk management index and delta is the most important hedging parameter.Practitioner often get the implied volatility from market price by the BSM model,and then calculate the delta through BSM model given the implied volatility,which is called "Practitioner Black-Scholes delta".However,such method would ignore the well-known correlation between implied volatility and spot price,which cannot satisfy the minimum variance delta.Due to this,this paper would try to make some adj ustments to the Practitioner Black-Scholes delta in order to get the minimum variance delta.We choose the daily TXO data and test the local volatility model minimum variance model,SABR model minimum variance delta and the Hull White quadratic model minimum variance delta.The result shows that Hull White quadratic model minimum delta shows no significant difference to Practitioner Black-Scholes delta while the local volatility model minimum delta and the SABR model performs worsen than Practitioner Black-Scholes delta.Based on Hull White quadratic model.This paper divides the sample data into three groups by the size of option time to maturity,and then estimates the parameters and calculates the minimum variance delta independently.Result shows such method does improve the delta hedging efficiency.Furthermore,we use the 1 month ATM option implied volatility as the proxy of market fluctuation level and we find the Hull White quadratic model using subsample performs better than Practitioner Black-Scholes delta in both cases.And it shows best performance in low fluctunation market.