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Optimization of covered calls under uncertainty
We present a two-stage stochastic program with recourse to construct covered call portfolios. To maximize the expected utility of a covered call portfolio, the model selects equity positions and call option overwriting weights for varying strike prices and expiry dates. Since the model has linear constraints and risk-averse utility functions are concave, the optimization problem is convex. The model is tested using 67 U.S. large-cap equities and optimizing the quadratic, negative exponential, and power utility functions. The expected utility is modeled as the average utility of the portfolio in a number of scenarios. Scenarios are first generated randomly then moment matching is employed, allowing the model to produce high quality results with a relatively small number of scenarios. To improve solution times we use a progressive hedging decomposition.
Optimization of covered calls under uncertainty
We present a two-stage stochastic program with recourse to construct covered call portfolios. To maximize the expected utility of a covered call portfolio, the model selects equity positions and call option overwriting weights for varying strike prices and expiry dates. Since the model has linear constraints and risk-averse utility functions are concave, the optimization problem is convex. The model is tested using 67 U.S. large-cap equities and optimizing the quadratic, negative exponential, and power utility functions. The expected utility is modeled as the average utility of the portfolio in a number of scenarios. Scenarios are first generated randomly then moment matching is employed, allowing the model to produce high quality results with a relatively small number of scenarios. To improve solution times we use a progressive hedging decomposition.
Optimization of covered calls under uncertainty
Optim Eng
Diaz, Mauricio (author) / Kwon, Roy H. (author)
Optimization and Engineering ; 21 ; 1635-1663
2020-12-01
29 pages
Article (Journal)
Electronic Resource
English
Covered call , Options , Portfolio optimization , Utility optimization , Stochastic programming , Progressive hedging Mathematics , Optimization , Engineering, general , Systems Theory, Control , Environmental Management , Operations Research/Decision Theory , Financial Engineering , Mathematics and Statistics
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