The Performance of Model Based Option Trading Strategies
Short summary:
This paper analyzes returns to trading strategies in options markets that ... simple strategy of just writing options (short) on the S&P 500 make an unusually ...
Long summary:
The paper reports the following empirical ï¬ ndings. First, we document that the
simple strategy of just writing options (short) on the S&P 500 make an unusually
large Sharpe ratio. This evidence supports ï¬ ndings in Coval and Shumway (2001)
who use data preceding ours. Second, the model based trading strategies work in
that they provide higher Sharpe ratios than those obtained from just selling options.
This is particularly so for options of short maturities. Third, returns from the options
strategies have insigniï¬ cant â betasâ with respect to returns on the underlying S&P
500 index, as well as the estimated spot volatility. If we interpret the market returns
and the volatility innovations as systmatic risk factors, we cannot reject the null
hypothesis that the model based options returns have zero systematic risk.
This remainder of the paper is organized as follows. The next section discusses the
construction of derivatives portfolios, discusses models to be considered, and discuss
the computation of posterior expected utilities. Section three describes the data
set. Section four presents empirical evidence on the performance of various trading
strategies ...
Source: www.econ.duke.edu
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