The Application of Delta Gamma Normal Value at Risk to  Measure the Risk in the Call Option of Stock

Ayu Astuti; Evy Sulistianingsih; Shantika Martha; Wirda Andani

doi:10.31764/jtam.v8i2.19669

The Application of Delta Gamma Normal Value at Risk to Measure the Risk in the Call Option of Stock

Ayu Astuti, Evy Sulistianingsih, Shantika Martha, Wirda Andani

Abstract

Call options of stock have a nonlinear dependence on market risk factors, thus encouraging the development of a method capable of measuring the risk of call option of stock, namely the Delta Gamma Normal Value at Risk (DGN VaR) method. The DGN VaR method can provide a more accurate VaR estimate than Delta Normal VaR (DN VaR) because of the Delta and Gamma sensitivity measures in the formula. The DGN VaR method uses the second-order Taylor Polynomial approach to approximate the return of stock price underlying the call option. This research applies the DGN VaR method to analyze the risk of call options of Atlassian Corporation (TEAM) and MicroStrategy Incorporated (MSTR). Both companies operate in the technology sector and are among the top 100 largest software companies based on market capitalization for the analysis period September 21, 2022 to September 21, 2023. The analyzed options in this research consist of in-the-money and out-of-the-money options with several strike prices (K). For in-the-money options, the strike prices are $105, $110, and $115 for TEAM, and $150, $160, and $170 for MSTR, while for out-of-the-money options, the strike prices are $190, $195, and $200 for TEAM, and $330, $340, and $350 for MSTR with varying confidence levels of 80%, 90%, 95%, and 99%. Based on the results of the analysis, the DGN VaR for the analyzed in-the-money option has a greater value than the DGN VaR for the analyzed out-of-the-money option.

Keywords

Call-Option; Nonlinear; Black-Scholes.

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DOI: https://doi.org/10.31764/jtam.v8i2.19669