Besides regular market-making activities, options instruments can be used to tame and profit from risk in a variety of ways:
- Generate alternative alpha
- Yield enhancement
- Defensive overlay: protective puts
- Tail hedging
- Event speculation
The SpiderRock Option Close Marks, Price Intervals, and Print Set data sets offer a variety of data points (historical options price data, implied volatility, Greeks) that can help investigate and backtest these option strategies using trade and volume data, trade synchronized Level I and Level II quotes, implied volatility surfaces and Greeks. Read more about our Historical Option Price Data Sets here.
Tail hedging, in particular, is interesting as rolling insurance against extreme events (which deceptively are not so rare and follow long-tail non-Gaussian distribution). For example, portfolio managers could simulate buying puts in the range 5-10 Delta, typically 30 to 60 calendar days to expiration out, in some proportion of the managed portfolio and backtest the performance of the strategy.
Tail hedging could also be used as a standalone alpha producing strategy or reversed to sell insurance, with a much higher risk that can still be investigated if acceptable under certain conditions or combined with various dispersion type strategies. In all these cases, the SpiderRock data sets – both intraday and end-of-day, contain all the data points needed for computations and statistical analysis.
Read previous articles on Retail Order Flow and How to Enhance Equity Strategies Using Skew Data Sets.