A Margin Requirement Based Return Calculation for Portfolios of Short Option Positions
University of Nebraska - Lincoln
December 9, 2012
Short option positions carry significant risk of losses well in excess of 100% of the initial option price. Margin requirements associated with such positions are therefore considerable. I develop a methodology for calculating margin requirement-based short option portfolio returns. Accounting for margin requirements reduces the returns of simple short option strategies by up to 92% compared to the price return. In long/short portfolio analyses, use of margin requirement returns necessitates additional methodological adjustments to ensure that unwanted volatility risk is properly hedged. The result is a portfolio return that more accurately represents the return realized by investors, and increased power to detect cross-sectional patterns in option returns.
Number of Pages in PDF File: 80
Keywords: Margin Requirements, Short Option Returns, Volatility Risk Premiumworking papers series
Date posted: June 17, 2011 ; Last revised: March 12, 2013
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