1. Zero-collar strategy of options
Zero-collar portfolio is a widely used option hedging strategy, which protects the underlying position by buying put (bullish) options while holding the underlying bulls (shorts), and at the same time, sells the bullish (bearish) options to offset the royalties. Recently, Sinopec's use of option-based no-cost neckline strategy to hedge imported crude oil has caused widespread concern and discussion in the industry. The specific strategy and the reasons for the loss are more than speculation. In this article, we will focus on the option-based no-cost neckline strategy itself, and conduct re-testing and back-testing of the no-cost neckline strategy based on NYMEX crude oil options.
No-cost neckline strategy generally adopts the ratio of 1: 1 to build call and put options with similar gears, or it can adopt the mode of 1: n to realize no-cost by selling more options with deeper imaginary value. This method has certain naked short positions and bears greater potential risks. Based on the data on September 2, 218, we constructed a no-cost neckline portfolio of NYMEX crude oil option 192 contract. On that day, the call@7 price was 3.65, the call@75 price was 1.75, the put@6 price was .87, the put@65 price was 2.1, and the option contract unit was 1 barrels per lot. We adopted two schemes to construct the neckline hedging portfolio of crude oil spot short positions: Option 2: Buy 1 lot of call@7, sell 4 lots of put@6, and the initial cash flow is -27/ lot.
Figure 1 and Figure 2 show the income structure of the two-week plan at different maturities, respectively. The scenario analysis part of the option price adopts 3% volatility to price the American option according to the binary tree model. In the first scheme, when the oil price rises slightly, the total position will suffer a certain loss. Without considering the specific details such as basis difference and term structure, the purchasing cost of crude oil can be kept at $75/barrel, and a wider or narrower neckline can also be selected according to the judgment of market conditions such as volatility. The neckline design of the second scheme chooses to buy flat call options and sell more imaginary put options at the same time. This strategy has great potential risks because it has three times of naked empty put options, and it also corresponds to a firmer judgment on the rise of oil prices. From the perspective of maturity income, the advantage of the strategy is that it is not affected when the oil price rises. When the oil price is slightly adjusted back (above 55), it has positive returns, and the position at the 6 mark has the largest return. This kind of strategy is generally not recommended, and its requirements for risk control are very high. If the target price falls below the 6 mark, it must be adjusted for risk control, such as choosing to move down, selling bearish positions and closing positions. Scheme 2 is also a strategy of bearish volatility because it has a larger seller's position. We will analyze the influence of volatility on the strategy in detail later.
In addition, the income structure curve that we usually analyze according to the option maturity value is only the income scenario analysis of the option's maturity. The combined mark-to-market value during the option duration is also affected by factors such as volatility and maturity time, and American options also have the risk of multiple early exercise. Implied volatility has a great influence on the option price, and since the crude oil price plummeted in October, the implied volatility of options has also soared rapidly, and the volatility index of CBOE crude oil ETF once rose from less than 3% to nearly 7%. For Option 1 (Figure 4), the increase in volatility will reduce the floating loss under the scenario of rising oil price and the floating profit under the scenario of falling oil price, and the impact of volatility will be more significant when the option is farther away from the expiration date. For Scheme II (Chart 5), as mentioned above, the break-even point of the maturity income of Scheme II is about $55/barrel, but in fact, before the option expires, the price level corresponding to the same loss line may be quite different from the actual mark-to-market profit and loss.
Finally, based on the actual trend of NYMEX crude oil options, we re-examine the performance of the two hedging schemes from September 2th, 218 to December 28th, 218, which is less than three weeks before the expiration date of the 192 option contract (November 16th, 219). The firm profit and loss curves of the two hedging schemes are consistent with our previous theoretical analysis conclusions.
In the first scheme, call@75 is bought and put@65 is sold at a ratio of 1: 1 when the oil price is $7/barrel, and the potential income below $65/barrel is sold to offset the hedging cost, so the total income is maintained at around $5/barrel despite the sharp drop in oil price.
in the second scheme, the ratio of 1: 4 is chosen, and four hands of put@6 are sold while buying one hand of call@7. This strategy is constructed under the condition of relatively more optimistic price. When the target price fluctuates slightly, the return is better than that of strategy 1. When the price falls, it has great potential risk and may trigger the forced execution of naked put option positions in advance. The strategy combination is affected by the sharp drop in oil price and the high volatility, and the floating loss once reaches about $42,/without stop loss.
2. Investment suggestion
"Option trading depends on strategy for three points and risk control for seven points". If the tail risk cannot be scientifically, timely and resolutely controlled, it can only be achieved by sacrificing the income under certain high probability conditions in exchange for security protection under extreme market conditions. Going back to the neckline strategy we discussed, the neckline hedging strategy constructed by the ratio of 1: 1 is a common and effective hedging scheme. There will be no problem in principle when setting the hedging position according to the method matching the number of multiple short positions of assets. Of course, there are many details in the actual operation, such as the term structure will affect the hedging effect to a certain extent, the accounting standards' treatment scheme for derivatives gains and losses, and so on.
for the hedging scheme, it is not recommended to sell more options than asset positions, and its potential risk exposure may bring great losses to the enterprise. We don't know the specific details of the cost neckline hedging strategy reportedly used in the Black Swan incident of Sinopec, but the analysis and resumption of different construction methods, characteristics and risk points of the cost-free neckline strategy derived from this incident hope to be helpful to investors.
3. Risk warning
The term structure will affect the hedging effect to a certain extent, and the accounting standards' treatment of derivative gains and losses will affect the calculation of total gains and losses in the current period.