Performance Expectations of Basic Options Strategies May Be Different Than You Think
23 Pages Posted: 15 Oct 2018
Date Written: October 3, 2018
There is much empirical evidence for the existence of a negative volatility risk premium. We consider how the volatility risk premium affects the returns of portfolios implementing seven popular option strategies. We find that option selling generates substantial excess return as well as risk mitigation by providing short exposure to the volatility risk premium. Net option buying is able to protect against extreme losses, however, these losses are very infrequent and short lived. Even during these periods, the long net exposure to the volatility risk premium erodes protection as the depth and duration of the losses persist.
Keywords: VRP, Volatility Risk Premium, Option Selling, Option Strategies, Risk Reduction With Options
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation