Options Trading Based on the Forecasting of Volatility Direction with the Incorporation of Investor Sentiment

Her-Jiun Sheu and Yu-Chen Wei

Emerging Markets Finance and Trade, 2011, vol. 47, issue 2, 31-47

Abstract: Using options price data on the Taiwanese stock market, we propose an options trading strategy based on the forecasting of volatility direction. The forecasting models are constructed with the incorporation of absolute returns, heterogeneous autoregressive-realized volatility (HAR-RV), and proxy of investor sentiment. After we take into consideration the margin-based transaction costs, the results of our simulated trading indicate that a straddle trading strategy that considers the forecasting of volatility direction with the incorporation of market turnover achieves the best Sharpe ratios. Our trading algorithm bridges the gap between options trading, market volatility, and the information content of investor overreaction.

Keywords: HAR-RV model; investor sentiment; market turnover; options trading; volatility forecasting (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://mesharpe.metapress.com/link.asp?target=contribution&id=R5078T67V7727603 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:47:y:2011:i:2:p:31-47

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/MREE20

Access Statistics for this article

More articles in Emerging Markets Finance and Trade from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().