← InstitutionalLesson 22 · 3:57
Desk case: building and running a hedged book
Summary
You can build a hedged options book from a mandate: choose the premium source from real data, size the book by its worst day with a tail hedge, run it through an example year and report the result honestly. You can explain why a test on the crash the book was sized on is not out-of-sample.
Key terms
- mandate
- The rules a desk must run by, such as a target return and a maximum loss.
- drawdown
- The drop from a high point in the book's value.
- volatility risk premium
- The gap by which implied volatility sits above the volatility that actually came, on average, paid to sellers for carrying crash risk.
- stress loss
- What a position would lose in a chosen bad case, such as realized volatility at double the priced level, used to size it.
- out-of-sample
- Past data locked away and used only once, to test a finished rule.
Check yourself
Answer each question to see why the right answer is right.
1. A made-up desk with $100,000 has a mandate: aim for 5% a year and never be down more than 10% from the top. What is that 10% drop from a high called?
2. Step one is choosing the premium source. What real data supports selling the volatility risk premium?
3. Seven lots unhedged lose $14,871 in the March 2020 replay; with four tail puts, $8,537; ten lots even with six puts lose $11,738. What size does the desk run, and what chose it?
4. Run through 2024, the book made $3,515, under 4%; its worst drop was under 3%; costs were $768 and tail puts $632. What does an honest report say?
5. Through 2020 the same rules had a worst drop a little over 6% and ended up less than 1%. Why does this prove less than it seems?
Finished the video and the quiz? .