Optimal option portfolio selection with simulation techniques

Abstract

We propose a method to solve the problem of asset allocation for option portfolios using simulations. Our method improved the OOPS(Optimal option portfolio strategies) proposed by Jose and Santa. We apply a simulation method based on Heston volatility model and optimization method based on utility maximization of constant relative risk aversion function. A detailed algorithm is designed to support dynamic rebalance of the option portfolio. The method has achieved a Sharpe ratio of 1.73.