Covered Call Writing in a Cumulative Prospect Theory Framework

23 Pages Posted: 1 Dec 2016

See all articles by Martina Nardon

Martina Nardon

Ca Foscari University of Venice - Dipartimento di Economia

Paolo Pianca

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: November 23, 2016

Abstract

The covered call writing, which entails selling a call option on one’s underlying stock holdings, is perceived by investors as a strategy with limited risk. It is a very popular strategy used by individual, professional and institutional investors; moreover, the CBOE developed the Buy Write Index which tracks the performance of a synthetic covered call strategy on the S&P500 Index. Previous studies analyze behavioral aspects of the covered call strategy, indicating that hedonic framing and risk aversion may explain the preference of such a strategy with respect to other designs. In this contribution, following this line of research, we extend the analysis and apply Cumulative Prospect Theory in its continuous version to the evaluation of the covered call strategy and study the effects of alternative framing.

Keywords: Behavioral Finance, Cumulative Prospect Theory, Hedonic Framing, Options Trading Strategies

JEL Classification: C63, D81, G13

Suggested Citation

Nardon, Martina and Pianca, Paolo, Covered Call Writing in a Cumulative Prospect Theory Framework (November 23, 2016). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 35/WP/2016, Available at SSRN: https://ssrn.com/abstract=2877353 or http://dx.doi.org/10.2139/ssrn.2877353

Martina Nardon (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Paolo Pianca

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy
+390412346915 (Phone)
+390415221756 (Fax)

HOME PAGE: www.dma.unive.it/~pianca

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
72
Abstract Views
732
rank
413,388
PlumX Metrics