Application of Option Protection Strategy in Portfolio Risk Management

DOI: https://doi.org/10.62517/jel.202614121

Author(s)

Tingkai Cui

Affiliation(s)

UOW College Hong Kong, Hong Kong, China

Abstract

The option protection strategy is an important tool for portfolio risk management. Its core is to build an asymmetric income structure for the spot position by buying put options, so as to effectively lock down the downside risk without giving up the rising potential. This paper systematically discusses the theoretical basis, functional orientation and practical path of the strategy. From the theoretical perspective, the protection strategy relies on the option pricing theory to construct the market-oriented pricing and transfer mechanism of risk; From the perspective of function, it has unique comparative advantages over traditional risk management methods in terms of systematic risk prevention and income smoothing; From a practical perspective, the effective implementation of the strategy needs to accurately grasp the key elements such as the implementation price and protection period, and establish a dynamic adjustment mechanism in coordination with portfolio management. In the future, with the continuous development of derivatives market, option protection strategy will play a more important role in portfolio risk management.

Keywords

Option Protection Strategy; Portfolio; Risk Management; Downside Risk

References

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