15 Pages Posted: 9 Nov 2008 Last revised: 22 Jun 2016
Date Written: September 15, 2007
Derivatives, which were originally introduced as financial instruments to hedge financial risk, are now increasingly used for speculative purposes as well. The diverse uses of derivatives arise from the skewing effect that options strategies have on the returns distribution of portfolios. In particular, it is widely believed that the performance of pure-stock portfolios can be enhanced by incorporating different options strategies, the most popular strategies being covered-call writing and protective-put buying.
The present study considers a class of stock and options strategies, involving a long or short position in a stock, combined with a long or short position in an option. The study applies these strategies to a sample of one hundred and twenty-seven stocks listed in National Stock Exchange F&O segment, using corresponding stock options and tries to find out which of these strategies yields maximum returns. It also tries to relate the optimal strategies and the returns from the optimal strategies to the characteristics of the distribution of returns of the underlying stock.
The findings of the study indicate the strategies that were optimal in two senses: one type of strategy that was optimal at the lowest strike price and whose payoff decreased with increase in strike price, and the other type of strategy that was optimal at the highest strike price and whose payoff increased with increase in strike price. It was found that only the standard deviation, skewness, and kurtosis of the returns distribution of the underlying stock affected the optimal strategy.
Keywords: derivatives, options strategy, returns distribution, standard deviation, skewness, kurtosis
JEL Classification: G11
Suggested Citation: Suggested Citation
Dash, Mihir and V., Kavitha and K.M., Deepa and S., Sindhu, A Study of Optimal Stock & Options Strategies (September 15, 2007). Available at SSRN: https://ssrn.com/abstract=1293203 or http://dx.doi.org/10.2139/ssrn.1293203