Optimal Hedging Strategies for OMX Option Portfolios: A Study of Different Strategies for Option Hedging Using the Greeks

Sammanfattning: The option markets have developed substantially during the past decades ever since the construction of a pricing model for options. After the model had been constructed tools for hedging were gradually developed, usually collectively referred to as the Greeks. This thesis empirically studies hedging using the Greeks and expands the research field by studying discrete hedging of OMX index options, while taking transaction costs into consideration. From the perspective of a market maker who manages a portfolio, hedging strategies for Gamma, Vega and Delta are examined. All portfolios and strategies are generated using a computer program constructed for this sole purpose. Each option which is included in a hedge is characterised according to its volatility, moneyness, call/put and maturity to analyse which characteristics are the most efficient in a hedge. In order to evaluate the different strategies the expected return, risk and the reward to variability ratio are evaluated in five time periods. The results indicate that no single strategy examined is optimal for all portfolios, but there is a single option type that is very efficient for all portfolios when combined wisely. The separate characteristics lead to the conclusion that maturity and moneyness are the pivotal attributes for all performance measurements while volatility is only vital for the risk.