Short Combo Strategy Using Barrier Options and its Application in Hedging

AbstractThis paper deals with a Short Combo option strategy and its application in hedging against an underlying price increase assuming the given underlying asset will be bought in the future. The key difference between the previous studies is that in this paper we are concentrated on single barrier options. Barrier options were formed to provide risk managers with cheaper means to hedge their exposures without paying for the price changes they believed unlikely to occur. The methodology is based on the profit functions in analytical form. We propose various hedging possibilities and show its practical application. In our analysis we used vanilla and barrier European options on SPDR Gold Shares. The results show that the Short Combo strategy formation using barrier options gives the end-users greater flexibility to express a precise view in the specific future price situations