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http://dx.doi.org/10.22156/CS4SMB.2020.10.04.046

Profitability of Options Trading Strategy using SVM  

Kim, Sun Woong (Trading System Major, Graduate School of Business IT, Kookmin University)
Publication Information
Journal of Convergence for Information Technology / v.10, no.4, 2020 , pp. 46-54 More about this Journal
Abstract
This study aims to develop and analyze the performance of a selective option straddle strategy based on forecasted volatility to improve the weakness of typical straddle strategy solely based on negative volatility risk premium. The KOSPI 200 option volatility is forecasted by the SVM model combined with the asymmetric volatility spillover effect. The selective straddle strategy enters option position only when the volatility is forecasted downwardly or sideways. The SVM model is trained for 2008-2014 training period and applied for 2015-2018 testing period. The suggested model showed improved performance, that is, its profit becomes higher and risk becomes lower than the benchmark strategies, and consequently typical performance index, Sharpe Ratio, increases. The suggested model gives option traders guidelines as to when they enter option position.
Keywords
Index option; Volatility risk premium; Short straddle strategy; Volatility forecasting; Asymmetric volatility spillover effect; SVM;
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