Variance Risk Premium And Option Trading Strategy For Delta Neutral Portfolio

Considering variance risk premium(VRP)is a determinant component of a delta-vega-neutral strategy,this study establishes a baseline model to predict VRP after sorting out thesis about factors that affect VRP and the mechanism behind.This multi-factor model includes the previous value of VRP,implied volatility of at-the-money call options,tradinginfo,skewness and trading volume of 50 ETF to predict VRP in the following day.The model can well predict the sign of VRP with an accuracy of 77% using rolling window regression.The hedging and trading strategy for the straddle beats that for the single option due to lower cost and higher gain.Profit and loss attribution for the straddle shows that gain comes from theta,the time value.Besides,the strategy of buying puts when the IVIX index is high is found to increase the profit by a large margin.This study enriches the methodology for forecast of VRP and trading strategy based on VRP.