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Probability and Computational Finance Seminar
Kevin Webster
Citadel LLC
Title: Leland strategy with both market and limit orders

Abstract: The Leland strategy proposes a discretization of the Black and Scholes delta-hedging strategy for European options under the presence of transaction costs. The talk revisits this problem in a market where limit orders and market orders are used simultaneously to trade. Adverse selection of the limit orders by other market participants plays a crucial role. Adverse selection drives the profitability of limit orders down, while providing hedging benefits for negative gamma options. This insight leads to an explicit execution strategy for delta-hedging after buying options.

Date: Monday, April 9, 2018
Time: 4:30 pm
Location: Wean Hall 8220
Submitted by:  Johannes Muhle-Karbe