Option Strategies: Good Deals and Margin Calls
University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics
Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
EFA 2006 Zurich Meetings
We investigate the risk and return of a variety of trading strategies involving options on the S&P 500. Overall, we find that strategies that short options constitute very good deals.
However, exploiting these good deals can be extremely difficult. Trading costs and margin requirements severely condition the implementation of the option strategies. Margin calls in particular have a double impact on trading strategies: they limit the notional amount of short-sale positions and they force investors out of trades precisely when they are losing money. These frictions limit the capacity of sophisticated investors to arbitrage away the mispricings in options markets.
Number of Pages in PDF File: 40
Keywords: Option strategies, margin requirements
JEL Classification: G12, G13working papers series
Date posted: March 25, 2005
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