Mispriced Index Option Portfolios
70 Pages Posted: 12 Jan 2017 Last revised: 13 Dec 2017
Date Written: August 9, 2017
The optimal portfolio of a utility-maximizing investor trading in the S&P 500 index and cash, subject to proportional transaction costs, becomes stochastically dominated when overlaid with a zero-net-cost portfolio of S&P 500 options bought at their ask and written at their bid price in most months over 1990-2013. Dominance is prevalent when the ATM-IV is high, right skew is low, and option maturity is short. The portfolios include mostly calls and positions are overwhelmingly short. Similar results obtain with options on the CAC and DAX indices. The results are explained neither by priced factors nor a non-monotonic stochastic discount factor.
Keywords: S&P 500 Options, Stochastic Dominance, Option Mispricing, Portfolio Management, CAC Options, DAX Options
JEL Classification: G10, G11, G13, G23
Suggested Citation: Suggested Citation