Pairs Trading In The index Options Market

43 Pages Posted: 2 Sep 2021

See all articles by Marianna Brunetti

Marianna Brunetti

Dept. Economics and Finance, University of Rome Tor Vergata; CEFIN

Roberta De Luca

Bank of Italy

Date Written: August 31, 2021


We test the Index options market efficiency by means of a statistical arbitrage strategy, i.e. pairs trading. Using data on five Stock Indexes of the Euro Area, we first identify any potential option mispricing based on deviations from the long-run relationship linking their implied volatilities. Then, we evaluate the profitability of a simple pair trading strategy on the mispriced options. Despite the signals of potential mispricing are frequent, the statistical arbitrage does not produce significant positive returns, thus providing evidence in support of Index Option market efficiency. The time-to-maturity of the options involved in the trade as well as financial market turbulence have a marginal effect on the eventual strategy returns, which are instead mostly driven by the moneyness of the options traded. Our results remain qualitatively unchanged if a stricter definition of reversion to the equilibrium is applied or when the long-run relationship is estimated on an (artificially derived) time series of options prices rather than on options’ implied volatilities.

Keywords: pairs trading, option market efficiency

JEL Classification: G10, G12, C44, C5

Suggested Citation

Brunetti, Marianna and De Luca, Roberta, Pairs Trading In The index Options Market (August 31, 2021). CEIS Working Paper No. 512, Available at SSRN: or

Marianna Brunetti (Contact Author)

Dept. Economics and Finance, University of Rome Tor Vergata ( email )

Via Columbia, 2
Rome, Lazio 00133


CEFIN ( email )

via Berengario 51
Modena, modena I-41100

Roberta De Luca

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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