Abstract:
Issues of hedging option positions by an American call-option seller are considered. The stop-loss start-gain strategy is modified by introducing a hedging “insensitivity” band. Average losses of a hedger using this method of hedging are calculated. An optimal width of the “insensitivity” band for minimizing the hedger's average losses is chosen.
Keywords:option hedging, stop-loss start-gain strategy, Wiener process, distribution of the number of crossings of a strip, optimal hedging band.