Model for Constructing an Options Portfolio with a Certain Payoff Function

TL;DR

This paper proposes an integer linear programming model for constructing options portfolios with specific payoff functions, demonstrated on Taiwan Futures Exchange options, showing potential for broad financial market applications.

Contribution

It introduces a novel optimization model for options portfolio construction using integer linear programming, incorporating payoff objectives and constraints.

Findings

Successfully constructed options portfolios using the model

Demonstrated the model's effectiveness on Taiwan Futures Exchange options

Potential for application in various financial markets

Abstract

The portfolio optimization problem is a basic problem of financial analysis. In the study, an optimization model for constructing an options portfolio with a certain payoff function has been proposed. The model is formulated as an integer linear programming problem and includes an objective payoff function and a system of constraints. In order to demonstrate the performance of the proposed model, we have constructed the portfolio on the European call and put options of Taiwan Futures Exchange. The optimum solution was obtained using the MATLAB software. Our approach is quite general and has the potential to design options portfolios on financial markets.