Valuation & Hedging of Cryptocurrency Inverse Options: with Backtest Simulations Using Deribit Options Data : A Look At Sepp & Lucic’s Research
Review of the Research Paper by Artur Sepp and Vladimir Lucic: “Valuation and hedging of cryptocurrency inverse options: with backtest simulations using Deribit options data”
Introduction: The research paper by esteemed quants, Artur Sepp and Vladimir Lucic, delves into the domain of inverse options in the realm of cryptocurrency. With cryptocurrencies experiencing burgeoning growth and influence, the dynamics of inverse options are becoming increasingly pivotal.
Key Takeaways?
- Nature of Inverse Options:
- Inverse options, the most liquidly traded options in the crypto environment, become traded in units of the underlying cryptocurrency. Their uniqueness and popularity are largely attributable to their ability to function without necessitating fiat cash accounts on crypto exchanges, like Deribit.
- Theoretical Framework:
- The authors articulate that inverse options can become equated to traditional vanilla options when viewed under the martingale measure, using the underlying cryptocurrency as the numeraire. This necessitates a modification to the option delta.
- Empirical Analysis:
- Drawing from four years of Deribit options data, Sepp and Lucic embark on simulating delta-hedged option strategies. They introduce two distinct accounting methods for trading P&L: USD and Coin accounting, both crucial for strategizing in the cryptocurrency options landscape.
- Interestingly, the research reveals that when performance metrics are in Coin and USD units, both USD and Coin accounting paradigms prove equivalent.
- Risk-Premia Insights:
- The study underscores a significant and negative risk-premia evident in options on the Deribit platform. This suggests that volatility-selling strategies are poised to yield positive risk-adjusted outcomes over an extended period.
In conclusion, Sepp and Lucic’s research offers profound insights into the nuanced world of inverse options within cryptocurrency.
Their combination of rigorous theoretical exploration and comprehensive empirical analysis provides a holistic understanding of the topic. Moreover, highlighting the equivalence of USD and Coin accounting in specific performance measurements. In addition, illuminating the nature of risk-premia in Deribit options. And lastly, the paper establishes foundational knowledge for anyone keen on cryptocurrency options.
Full paper:
More on Artur Sepp’s work:
Scientists Alexander Lipton & Artur Sepp Develop Hybrid Methods (rebellionresearch.com)
