October 28, 2015 - Equity Options
How well do equity index option strategies work during crises? In his October 2015 paper entitled “The Performance of Equity Index Option Strategy Returns during the Financial Crisis”, Dominik Schulte tests the profitability of long and short equity index option strategies during the financial crisis of 2008, including long (as defined) and short (opposite) versions of:
- Call: buy a call.
- Put: buy a put.
- Straddle: buy a call and sell a put with the same maturity and strike.
- Strangle: buy a call and a put with the same maturity, but with the call at a higher strike.
- Butterfly: buy in-the-money and out-of-the-money calls and sell two at-the-money calls, all with the same maturity.
- Put spread: sell an out-of-the-money put and buy an at-the-money put.
- Put-call spread: sell an out-of-the-money put and buy an at-the-money call.
He considers maturities of one to three months and moneyness from 90% to 110% as allowed. To assess the import of non-normal return distributions, he considers strategy return skewness, kurtosis and Omega ratio (which incorporates all moments). He estimates trading frictions from bid-ask spreads. Using end-of-month bids and asks for calls and puts on the S&P 500, the EuroStoxx 50 and the DAX indexes during January 2006 through September 2010, he finds that: Keep Reading