Abstract

http://ssrn.com/abstract=1569380
 
 

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Optimal Option Portfolio Strategies


José Faias


Catholic University of Portugal (UCP)

Pedro Santa-Clara


New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

January 2011

AFA 2011 Denver Meetings Paper

Abstract:     
Options should play an important role in asset allocation. They allow for kernel spanning and provide access to additional (priced) risk factors such as stochastic volatility and negative jumps. Unfortunately, traditional methods of asset allocation (e.g. mean-variance optimization) are not adequate for options because the distribution of returns is non-normal and the short sample of option returns available makes it difficult to estimate the distribution. We propose a method to optimize option portfolios that solves these limitations. An out-of-sample exercise is performed and we show that, even when transaction costs are incorporated, our portfolio strategy delivers an annualized Sharpe ratio of 0.59 between January 1996 and September 2008.

Number of Pages in PDF File: 38

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Date posted: March 14, 2010 ; Last revised: April 11, 2011

Suggested Citation

Faias, José and Santa-Clara, Pedro, Optimal Option Portfolio Strategies (January 2011). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1569380 or http://dx.doi.org/10.2139/ssrn.1569380

Contact Information

José Faias (Contact Author)
Catholic University of Portugal (UCP) ( email )
Palma de Cima
Lisboa, 1649-023
Portugal
Pedro Santa-Clara
New University of Lisbon - Nova School of Business and Economics ( email )
Lisbon
Portugal
HOME PAGE: http://docentes.fe.unl.pt/~psc/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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