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Gate.io Research: Hedging Strategies—Umbrella of Options Trading

2020-07-26 17:21:03Read:37600

In 1936, British mathematician Alan Turing put forward the concept of Turing Machine, opening up a new chapter for the research of Artificial Intelligence (AI). Today, we have reached a point where deep learning plays a more prominent role and it has become a hot topic on how to apply AI in the financial sector. In this report, an artificial Recurrent Neural Network (RNN) called Long-Short-Term-Memory (LSTM) is applied to forecast the implied volatility of Bitcoin (BTC) prices, along with the mainstream hedging strategies explicitly illustrated. It has been found that the LSTM architecture can play a role in predicting BTC volatilities.

Key Takeaways:

-Options trading risks emerge when the applied model fails to predict market movements in an appropriate manner.

-In typical hedging strategies, sellers tend to put stop loss orders as an attempt to hedge the price volatility of the underlying asset; while buyers often resort to Delta and Gamma as a way to make profits regardless of a surge or slump of the underlying price in a short period of time.

-With the LSTM network, it has been found that the model cannot present a good forecast of the BTC price volatility in the event of a highly volatile price movement; however, the prediction results and the true value of the test set are close to the overall volatility trend, which indicates LSTM can serve as a reference for options trading activities.


The report will be uploaded soon. Please stay tuned!

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Gate.io
July 26, 2020

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