Mispriced index option portfolios

George Constantinides, Michal Czerwonko and Stylianos Perrakis ()

Financial Management, 2020, vol. 49, issue 2, 297-330

Abstract: In model‐free out‐of‐sample tests, we find that the optimal portfolio of a utility maximizing investor trading in the S&P500 Index, cash, and index options bought at ask and written at bid prices stochastically dominates the optimal portfolio without options and yields returns with higher mean and lower volatility in most months from 1990 to 2013. Unlike earlier claims of overpriced puts, our portfolios include mostly short calls and are particularly profitable when maturity is short and volatility is high. Similar results are obtained with the CAC and DAX indices. Neither priced factors nor a nonmonotonic stochastic discount factor explains the excess returns.

Date: 2020
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https://doi.org/10.1111/fima.12288

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Working Paper: Mispriced Index Option Portfolios (2017)
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