Performance Expectations of Basic Options Strategies May Be Different Than You Think

23 Pages Posted: 15 Oct 2018

See all articles by Steven P. Clark

Steven P. Clark

University of North Carolina (UNC) at Charlotte

Mike Dickson

University of North Carolina at Charlotte; Horizon Investments

Date Written: October 3, 2018

Abstract

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

Clark, Steven P. and Dickson, Mike and Dickson, Mike, Performance Expectations of Basic Options Strategies May Be Different Than You Think (October 3, 2018). Available at SSRN: https://ssrn.com/abstract=3259615 or http://dx.doi.org/10.2139/ssrn.3259615

Steven P. Clark

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Mike Dickson (Contact Author)

University of North Carolina at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Horizon Investments ( email )

Charlotte, NC
United States
7049193611 (Phone)
7049193611 (Fax)

HOME PAGE: http://www.horizoninvestments.com/

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