Returns to trading portfolios of FTSE 100 index options

Xiaoquan Liu

Applied Financial Economics, 2007, vol. 17, issue 15, 1211-1225

Abstract: It has been argued that the persistent mispricing of options, especially the overpricing of out-of-money put options, is a major reason for the often observed negative skewness in the risk-neutral price distributions of equity indices. This article investigates whether the Financial Times Stock Exchange 100 Shares index put options are overpriced compared with call options of the same moneyness and, if they are, whether this gives rise to profit opportunities in the market. By testing the weekly returns to delta and vega neutral portfolios with long positions in put options and short positions in call options, we find that the returns are consistently negative. However, short selling the portfolios is unlikely to give arbitrage profits due to the bid--ask spread.

Date: 2007
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DOI: 10.1080/09603100600905079

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