Abstract

The article provides a comprehensive analysis of the volatility risk premium (VRP) in the oil market. We approach the problem from the practitioner’s perspective as an investment strategy that sells and delta-hedges oil options, paying particular attention to the strategy’s risk-adjusted returns and its drawdown characteristics. The results are differentiated across options with different moneyness and expirations and presented in the form of VRP smile and VRP term-structure. Strategy results are analyzed using alternative delta-hedging techniques that vary hedging frequencies, hedging thresholds, and volatilities used to calculate options’ delta. We discuss the performance under different regimes and highlight the structural break driven by the changing behavior among main participants in the oil options market.

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.