Option strategies: Good deals and margin calls

Pedro Santa-Clara and Alessio Saretto

Journal of Financial Markets, 2009, vol. 12, issue 3, 391-417

Abstract: We provide evidence that trading frictions have an economically important impact on the execution and the profitability of option strategies that involve writing out-of-the-money put options. Margin requirements, in particular, limit the notional amount of capital that can be invested in the strategies and force investors to close down positions and realize losses. The economic effect of frictions is stronger when the investor seeks to write options more aggressively. Although margins are effective in reducing counterparty default risk, they also impose a friction that limits investors from supplying liquidity to the option market.

Keywords: Limits; to; arbitrage; Option; strategies (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (61)

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Working Paper: Option Strategies: Good Deals and Margin Calls (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:12:y:2009:i:3:p:391-417

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