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Option Strategies: Good Deals and Margin CallsAlessio SarettoUniversity of Texas at Dallas - School of Management - Department of Finance & Managerial Economics Pedro Santa-ClaraNova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) January 2006 EFA 2006 Zurich Meetings Abstract: 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, G13 working papers seriesDate posted: March 25, 2005Suggested CitationContact Information
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