Please use this identifier to cite or link to this item:
|Title:||Combinatorics of Option Spreads: The Margining Aspect|
Discipline of Business Analytics
|Abstract:||In December 2005, the U.S. Securities and Exchange Commission approved margin rules for complex option spreads with 5, 6, 7, 8, 9, 10 and 12 legs. Only option spreads with 2, 3 or 4 legs were recognized before. Taking advantage of option spreads with a large number of legs substantially reduces margin requirements and, at the same time, adequately estimates risk for margin accounts with positions in options. In this paper we present combinatorial models for known and newly discovered option spreads with up to 134 legs. We propose their full characterization in terms of matchings, alternating cycles and chains in graphs with bicolored edges. We show that the combinatorial analysis of option spreads reveals powerful hedging mechanisms in the structure of margin accounts, and that the problem of minimizing the margin requirement for a portfolio of option spreads can be solved in polynomial time using network flow algorithms. We also give recommendations on how to create more efficient margin rules for options.|
|Department/Unit/Centre:||Discipline of Business Analytics|
|Type of Work:||Working Paper|
|Appears in Collections:||Working Papers - Business Analytics|
This work is protected by Copyright. All rights reserved. Access to this work is provided for the purposes of personal research and study. Except where permitted under the Copyright Act 1968, this work must not be copied or communicated to others without the express permission of the copyright owner. Use the persistent URI in this record to enable others to access this work.
|OMWP_2010_04.pdf||405.24 kB||Adobe PDF||View/Open|
Items in Sydney eScholarship Repository are protected by copyright, with all rights reserved, unless otherwise indicated.