Option Portfolio Strategies: Measurement and Evaluation

The Buy-Write Strategy, Index Investment, and the Efficient Market Hypothesis: More Australian Evidence

“…Findings indicate that in-the-money puts lower returns and variance more than out-of-the-money puts but as before, mispriced option contracts will produce increased gains for moderate increases in variance. Bookstaber and Clarke (1984) use mathematical algorithms to compare the distributions between stocks and combinations of stock/option portfolios. They find that writing call options on a portfolio lead to an asymmetric payoff, in effect, a rightward shift in the entire distribution followed by a truncation of payoffs at a pricedetermined pivot point.…”

Flight of the Condors: Evidence on the Performance of Condor Option Spreads in Australia

“…Some studies claim that covered call writing, for instance, demonstrates the potential to produce above average risk-adjusted returns (El-Hassan et al, 2004;Frino and Wearin, 2004;Hill et al, 2006;Jarnecic, 2004;Niblock and Sinnewe, forthcoming;O'Connell and O'Grady, 2014;Whaley, 2002). On the contrary, there is evidence to suggest that option-based strategies may actually weigh on investment returns and are inefficient methods of allocating wealth (Bookstaber and Clarke, 1984;Booth et al, 1985;Hoffmann and Fischer, 2012;Lhabitant, 1999;Merton et al, 1978;Mugwagwa et al, 2012). Hoffmann and Fischer (2012) maintain that option-based strategies can only be profitable in a mean-variance framework if the writer/taker can predict stock prices during the holding period (Reilly and Brown, 1997) and if call or puts are mispriced due to uncertainty associated with estimating volatility (Benninga and Blume, 1985;Black, 1975;Figlewski and Green, 1999;Hill et al, 2006;Leggio and Lien, 2002;Rendleman, 2001); thus, inferring market inefficiencies (Black and Scholes, 1972;Fama, 1998).…”

“…Given that option-based strategies have been found to exhibit asymmetric return distributions, a mean-variance analysis of their performances may not be appropriate (Bookstaber and Clarke, 1984;Booth et al, 1985;Lhabitant, 1999;Merton et al, 1978). For example, option spread trading shortens the positive/negative tail of the return distribution resulting in negative/positive skewness and decreases components of the variance; that is, upside/downside risk (Bookstaber and Clarke, 1984).…”

“…For example, option spread trading shortens the positive/negative tail of the return distribution resulting in negative/positive skewness and decreases components of the variance; that is, upside/downside risk (Bookstaber and Clarke, 1984). Claims of outperformance based on the assumption that option returns produced from such strategies are normally distributed can therefore be misleading.…”

Optioned Portfolio Selection: Models and Analysis

“…One reason for wide applications of options is due to versatile payoff structures of options, which can be used to form investment portfolios with desirable risk profiles [8,14]. The performance evaluator of portfolios with options has been investigated extensively in the literature; see [1,3,4,5,6]. The optioned portfolio selection has attracted much attention both in theory and in practice.…”