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3

So, you simulate the pnl one month in advance in a scenario where the Index has moved down by 20%. This is for options which are 30% + out of the money. In your example this would be August expiration and 1400 strike not the 1600 strike. So if you are long X index shares, as you said then you would lose 400x in one month's time. You buy Y puts to ...


3

just take a call and a put struck at $K$ and add them together. For the hedge just add the hedges together as well.


2

Just a heads up, I'm not going to go through all the mathematical caveats of using this approach. Let $\Sigma$ be your covariance matrix, and $X$ a random vector of daily returns. So $$\text{Var}(X) = \Sigma.$$ You have a bug in your code. In your code you call it pxCov, but you probably meant to use cov() insted of cor(). Check out the documentation to ...


1

Another approach as follow. The $T$-Straddle option $X$, i.e. $$X=\left\{ \begin{align} & K-S(T)\quad ,\quad 0<S(T)\le K \\ & S(T)-K\quad ,\quad S(T)>K \\ \end{align} \right. $$ has then following contract function $$\Phi (x)=\left\{ \begin{align} & K-x\quad ,\quad 0<x\le K \\ & x-K\quad ,\quad x>K \\ \end{align} \right....



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