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 language | English |
---|---|
Place of Publication | Tilburg |
Publisher | SSRN |
Number of pages | 52 |
DOIs | |
Publication status | Published - May 2015 |
Keywords
- derivatives trading
- execution timing
- optimal stopping
- dynamic programming
- straddles
- dynamic order strategies