Hedge Sugar-ing

This section takes into account the impact of trading fees on risk-neutral pricing, represented by the symbol.

using $\phi_k$ to denote the proportion of the hedge purchased for a given strike in a given epoch, the return for "selling" it can be shown as

APR_k=12\times\left(\frac{1-c}{1-\phi_k}\right),

and in order for a no-arbitrage environment, we must have the relation

P_k=\frac{\phi_k}{1-c}.

It should be noted that although the APR for selling a hedge may seem quite high, there is always a probability $P_k$ of the seller's entire position being liquidated.

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Last updated 2 years ago

This section takes into account the impact of trading fees on risk-neutral pricing, represented by the symbol.

using $\phi_k$ to denote the proportion of the hedge purchased for a given strike in a given epoch, the return for "selling" it can be shown as

APR_k=12\times\left(\frac{1-c}{1-\phi_k}\right),

and in order for a no-arbitrage environment, we must have the relation

P_k=\frac{\phi_k}{1-c}.

It should be noted that although the APR for selling a hedge may seem quite high, there is always a probability $P_k$ of the seller's entire position being liquidated.