Hedge fund options scenario

Hedge funds continue to be one of the most dynamic users of both stock and OTC options, especially in the US, but some managers are still unable to take advantage of these tools.

Equity-based investment strategies are managed by hedge funds, which make up the majority of the stock options market. Several funds focus on the US stock market, using individual stock options, ETF-index options to hedge risk.

Types of options-based strategies


Covered sales or call options have always been a long-term / short-term stock manager feature, especially in markets where one-time contracts are widely available.

In Asia, for example, the choice of one-name options is extremely limited, with leaders still dependent on OTC contracts or key volatility strategies.

A equity hedge fund can use index-based provisions to call up or hedge down its impact economically. Managers have been able to profit from both long and short positions using both options. However, it is difficult to secure a steady income in a short-term growing market, as selling calls is not a “forgotten” strategy.

There are highly sophisticated defense strategies that regularly use options such as hedge tail risk. Hedge fund managers are very careful in 2007-08. due to the global financial crisis. They need to reassure investors that the fund is ready for the next event, gray or swan.

It is understood that the value of selling options (not just stocks) has plummeted in times of high volatility (eg, credit crunch, crash), and more fund managers are considering options for replacing cash-for-cash or treasury bonds. Holdings.

Selling covered calls բարել improving profitability

Deals covered by hedge funds are preferred at a time when fund managers are relatively neutral in the market. This generates a premium income and reduces the potential negative impact of a long-term position.

One of the major risks of a profitability strategy is that the option holder chooses to use it to secure dividends. While the “best profit” threshold is understood from the perspective of risk management, the possibility of using the option is also very quantitative, as a delta of 0.95 or more is an excellent benchmark.

There is also the risk of prematurely assigning American-style options, as the call options lender can use the option at any time before the expiration date, but most likely when the dividend is more than the excess of the intrinsic value.


Instability-based strategies make the best use of options, with uncertainty being considered as one of the most important components of option evaluation.

Several hedge funds use options to predict the direction of potential instability. For example, using CBOE® VIX® options or futures. Because the assumed volatility itself trades in a dimension that can be described through technical analysis, the fund may focus on potential selling points indicated by traditional price ranges.


The options can be used by the Activists Fund to benefit from various arbitration terms. Instability arbitration has evolved from a hedging method into an independent strategy. There are large trading instabilities in hedge funds as a class of net assets.

In essence, hedge fund option tables can arbitrage option prices to use them to arbitrate other asset classes using different options recorded on a similar asset to take advantage of a relatively incorrect price.

Dispersion Trade

The dispersion trade has become very popular with hedge funds who would like to bet on a high level of correlation between the huge stocks that make up the index components. The fund manager usually sells options on the index և buys shares on the individual shares that make up the index.

If there is a maximum dispersion, individual stock options generate returns, while short-term index options lose only modest amounts. Dispersion trading is effectively limited by a ratio that lasts for a long time with instability.

An investment manager needs to have a good idea of ​​when such a situation is likely to occur;

Tail risk funds

It is a fund set up to provide liquidity in the event of specific risks (for example, securities markets are falling by more than 20%). It has become a popular portfolio for investors looking to meet commitments in the event of declining market liquidity.

Options are a class of vital assets used for algorithmic funds due to the increased use of e-commerce for option transactions. One of the key selling points of hedge funds was the liquidity առ operational efficiency associated with options traded on the stock exchange.

Hedge funds are increasingly using weekly position control options to allow successful positions to develop quickly. They can also guarantee a drop in competitive prices.

As the options industry continues to grow, there will be future prospects for hedge fund managers.

This stems not only from the expansion of the available product group, but also from the improvement of the operational efficiency and transparency of the customs-traded goods sold on the exchange. Regulatory requirements for a very dynamic market will also play a significant role.