Changes in Effectiveness of Delta Hedging Using Options on the WIG20

Abstract

Purpose: Based on the research carried out by the author in 2007 and 2015, an increase in the effectiveness of delta hedging with the use of options on the WIG20 was found. The purpose of the study is to compare the results of the 2017–2018 delta hedging effectiveness studies with the results of previous studies, as well as to assess the changes in the effectiveness with an indication of possible causes. Design/methodology/approach: To compare the effectiveness of delta hedging, the estimated Value at Risk was used for unhedged and hedged portfolios in the analyzed periods. The results obtained on the basis of data from the years 2017–2018 were compared with the results for the data from 2007 and 2015. Findings: On the basis of the conducted research, the effectiveness of delta hedging using options on the Polish market can be generally stated, but the durability of the high effectiveness of delta hedging observed in 2015 cannot be stated. In the years 2017–2018, there was a decrease in the effectiveness of delta hedging associated with a significant decrease in liquidity on the option market. The research results highlight the importance of liquidity for the proper option pricing as well as for the possibility of risk reduction. Research limitations/implications: Some difficulty and limitation of the study were quite frequent lack of data regarding the options analyzed in the period 2017–2018. Originality/value: The value of the obtained results is increased by their uniqueness, as changes in the effectiveness of delta hedging on the Polish options market are not discussed in the literature by other authors.