Strangle

The Options used to construct the strangle are 110-CE, 100-PE and the option used to hedge is 105-PE All the above options are having same maturity- Jan 2017

The Strangle Strategy was analysed across the historical data. The historical stock prices were fitted against the Normal and T distribution. The Straddle Strategy was hedged along both the simulated Normal and T distributions as well. The Summary stats for the strategy can be seen below.

load("PEPSI-StrangleStrategyResults.RData")
StrangleStrategySummary
##   HedgeInterval Historical_PnL MeanPnLNormalDist MeanPnLTDist
## 1             1       129.6731          146.3434     146.4379
## 2             5       145.6253          130.2840     130.3598
## 3            10       148.8506          131.7549     131.8414
## 4            25       156.6771          136.2149     136.3086
## 5            50       162.8636          136.8210     136.9122
## 6            75       161.8160          135.6137     135.7015
## 7           100       163.0152          136.8234     136.9146
## 8           125       160.4668          136.5264     136.6134
## 9           150       163.4101          135.3358     135.4237

Plotting the variations in PnL based on Hedge Frequency

The potential profit seems to increase for the original data as well as for the lognormal distribution simulation and the T-distribution simulation when we decrease the hedging frequency. This is not surprising because the profit and loss from daily hedging should be closer to zero, as frequent hedging avoids any profits and losses getting accumulated into our portfolio.

Note that the NORMAL DIST and T DIST are very close to each other. The closeness of the Normal and the T dist performance can be attributed to the fact that Pepsi has a very low volatility and mean even before performing the fitting this duration.