Returns from Investing in S&P500 Futures Options, 1985–2010

Alexandre Ziegler and William T. Ziemba

Chapter 21 in The World Scientific Handbook of Futures Markets, 2015, pp 643-688 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Puts and calls on S&P500 futures are bought and sold for various purposes including speculation, hedging, and portfolio insurance. We investigate the rate of return from buying or selling these options from 1985 until 2010. These rates of return are variable and depend upon the trading horizons, the level of the VIX volatility index, whether the options are in or out or near the money and whether the market is rallying or in a crash mode. We specifically study the 2007–2009 stock market crash period and various bullish market periods. Our results show that while selling out of- the-money options is generally profitable, it sometimes generates steep losses. Hence, speculators trying to take advantage of mispriced options are wise to utilize accurate prediction models, devise variable types of hedged strategies, be well capitalized to weather market storms and have strategies in place to deal with them.

Keywords: Futures Markets; Pricing; Risk Management; Futures Trading; Stock Indexes; Interest Rates; Futures Prices; Portfolio Theory; Hedge Funds; Foreign Exchange (search for similar items in EconPapers)
Date: 2015
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