Mispriced Index Option Portfolios

70 Pages Posted: 12 Jan 2017 Last revised: 13 Dec 2017

See all articles by George M. Constantinides

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Michal Czerwonko

Concordia University

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 9, 2017

Abstract

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

Constantinides, George M. and Czerwonko, Michal and Perrakis, Stylianos, Mispriced Index Option Portfolios (August 9, 2017). Available at SSRN: https://ssrn.com/abstract=2897084 or http://dx.doi.org/10.2139/ssrn.2897084

George M. Constantinides

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7258 (Phone)
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Michal Czerwonko (Contact Author)

Concordia University ( email )

1455 De Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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