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ИД «Финансы и кредит»






Digest Finance

Using a Synthetic Strangle to Manage Stock Market Risk

Vol. 22, Iss. 3, SEPTEMBER 2017

Received: 15 February 2017

Received in revised form: 7 March 2017

Accepted: 13 April 2017

Available online: 21 September 2017


JEL Classification: C01, G01, G32

Pages: 286-297


Yashin S.N. National Research Lobachevsky State University of Nizhny Novgorod, Nizhny Novgorod, Russian Federation

Koshelev E.V. National Research Lobachevsky State University of Nizhny Novgorod, Nizhny Novgorod, Russian Federation

Sokolov V.V. National Research Lobachevsky State University of Nizhny Novgorod, Nizhny Novgorod, Russian Federation

Importance Options are a representative example of derivative securities that are applied to mitigate investors’ risks. Considering contradictions and discrepancies arising from changes in the options price due to the fluctuating price for primary securities, rather than the flat exercise price for the option, investors seek possible combinations of securities so to reduce equity risks. The article considers a synthetic options strategy – a synthetic strangle.
Objectives The research models a synthetic strangle and applies it in practice using stocks of LUKOIL Oil Company.
Methods The research involves methods of logic and statistical analysis.
Results We apply a symmetrical binomial lattice to determine the synthetic strangle price. Based on a binomial model, we build the model of LUKOIL’s stock price movement and consider the case of synthetic strangle duplication by constructing a portfolio of stocks and bonds, which generates the same cash flows as options.
Conclusions and Relevance It is feasible to use a synthetic strangle in a situation when market stock price movements are uncertain and investors protect their capital against unexpected fluctuations in the stock market by purchasing a synthetic option. We also found break-even points for the investor.

Keywords: synthetic option, strangle, option, equity risk


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