The Option Value in Timing Derivative Trades

Feico Drost, T.G.E. van der Heijden, Bas Werker

Research output: Working paperOther research output

Abstract

Risk-neutral traders executing derivative trades on behalf of portfolio managers maximize their expected profit compared to trading at pre-determined times by timing trades, using the quickly changing risk exposures of derivative baskets. The optimal order submission strategy is a sequence of stop orders with a time-varying stop price. Timing a straddle trade yields up to 20bps per day in a frictionless world, and up to 72bps per day on the S&P500. A CRRA trader is willing to pay up to 51bps of the value of the derivatives to switch from trading at a fixed time to the optimal timing strategy.
Original languageEnglish
Place of PublicationTilburg
PublisherSSRN
Number of pages52
DOIs
Publication statusPublished - May 2015

Keywords

  • derivatives trading
  • execution timing
  • optimal stopping
  • dynamic programming
  • straddles
  • dynamic order strategies

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