Is There Money To Be Made Investing In Options

Is there money to be made investing in options

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Is There Money to Be Made Investing in Options?

Is there money to be made investing in options

A Historical Perspective

35 PagesPosted: 4 Jan 2006Last revised: 16 Jul 2008

Date Written: December 8, 2006

Abstract

This paper examines the historical performance of 12 portfolios that include S&P 100/500 index options. Each option portfolio is formed using options with different maturities and moneyness, while incorporating bid-ask spreads, transaction costs, and margin requirements.

Is there money to be made investing in options

Raw and risk-adjusted returns of option portfolios are compared to a benchmark portfolio that is only long the underlying asset. This allows the marginal impact of including options in the portfolio to be examined.

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The analysis reveals that including options in the portfolio most often results in underperformance relative to the benchmark portfolio. However, a portfolio that incorporates written options can outperform the benchmark on a raw and risk-adjusted basis.

This result is dependent on restricting option investment relative to the maximum allowable margin.

Is there money to be made investing in options

While positive and significant risk-adjusted performance is observed for some option portfolios, greater risk tolerance relative to the long index benchmark portfolio is required.

Keywords: Portfolio Returns, Option Strategies, Option Pricing, Sharpe Ratios, S&P 500

JEL Classification: G11, G12, G13

Suggested Citation:Suggested Citation

Doran, James and Fodor, Andy, Is There Money to Be Made Investing in Options?

A Historical Perspective (December 8, 2006). Available at SSRN: https://ssrn.com/abstract=873639 or http://dx.doi.org/10.2139/ssrn.873639

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