Performance expectations of basic options strategies may be different than you think

Steven P. Clark () and Mike Dickson ()
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Steven P. Clark: University of North Carolina at Charlotte
Mike Dickson: Horizon Investments, LLC

Journal of Asset Management, 2019, vol. 20, issue 2, No 1, 102 pages

Abstract: Abstract There is much empirical evidence for the existence of a negative volatility risk premium. We consider how the volatility risk premium affects the returns of portfolios implementing seven popular option strategies. We find that option selling generates substantial excess return as well as risk mitigation by providing short exposure to the volatility risk premium. Net option buying is able to protect against extreme losses; however, these losses are very infrequent and short lived. Even during these periods, the long net exposure to the volatility risk premium erodes protection as the depth and duration of the losses persist.

Keywords: Option returns; Option strategy indexes; Volatility risk premium (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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DOI: 10.1057/s41260-019-00111-x

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