COMBINATIONS OF OPTION SPREADS

Dmytro Matsypura, Vadim G. Timkovsky

2012

Abstract

Having been constructed as trading strategies, option spreads are also used in margin calculations for offsetting positions in options. All option spreads that appear in trading and margining practice have two, three or four legs. It is well-known that the option spreads with three and four legs are combinations of two option spreads with two legs, and that hedging mechanisms of these combinations consolidate hedging mechanisms of their components. Although more complex combinations with similar properties can be traced in regulatory literature of 2003, they have not yet been studied and used. In this paper we develop a theory for the construction of multi-leg option spreads as combinations of well-known option spreads with two, three and four legs. We show how multi-leg option spreads with extreme properties can maximize arbitrage opportunities in trading options and substantially reduce margin requirements for option portfolios.

References

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Paper Citation


in Harvard Style

Matsypura D. and G. Timkovsky V. (2012). COMBINATIONS OF OPTION SPREADS . In Proceedings of the 1st International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES, ISBN 978-989-8425-97-3, pages 321-331. DOI: 10.5220/0003798003210331


in Bibtex Style

@conference{icores12,
author={Dmytro Matsypura and Vadim G. Timkovsky},
title={COMBINATIONS OF OPTION SPREADS},
booktitle={Proceedings of the 1st International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,},
year={2012},
pages={321-331},
publisher={SciTePress},
organization={INSTICC},
doi={10.5220/0003798003210331},
isbn={978-989-8425-97-3},
}


in EndNote Style

TY - CONF
JO - Proceedings of the 1st International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,
TI - COMBINATIONS OF OPTION SPREADS
SN - 978-989-8425-97-3
AU - Matsypura D.
AU - G. Timkovsky V.
PY - 2012
SP - 321
EP - 331
DO - 10.5220/0003798003210331