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A Margin Requirement Based Return Calculation for Portfolios of Short Option Positions

80 Pages Posted: 17 Jun 2011 Last revised: 12 Mar 2013

Scott Murray

Georgia State University

Date Written: December 9, 2012

Abstract

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.

Keywords: Margin Requirements, Short Option Returns, Volatility Risk Premium

Suggested Citation

Murray, Scott, A Margin Requirement Based Return Calculation for Portfolios of Short Option Positions (December 9, 2012). Available at SSRN: https://ssrn.com/abstract=1863628 or http://dx.doi.org/10.2139/ssrn.1863628

Scott Murray (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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