Options Portfolio Selection with Position Limits

33 Pages Posted: 5 Dec 2022

See all articles by Paolo Guasoni

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Eberhard Mayerhofer

University of Limerick - Department of Mathematics and Statistics

Mingchuan Zhao

University of Limerick - Department of Mathematics and Statistics

Date Written: November 28, 2022

Abstract

This paper examines the performance from 1996 to 2020 of mean-variance efficient portfolios of monthly options with all available strikes on each of the S&P 500, Nasdaq 100, and Dow Jones indexes, using a constrained optimization approach that incorporates position limits, transaction costs, and volatility persistence. The Sharpe ratios of index-neutral strategies is between one and two for the S&P 500 and Nasdaq 100, but less than half for the Dow Jones. Constraining portfolios to be solvent on all past index' returns reduces Sharpe ratios by a third in the S&P 500 and Nasdaq 100 and by two thirds in the Dow Jones. All strategies suffer significant losses from the coronavirus shock of 2020, underscoring their vulnerability to rare events.

Keywords: options, portfolio choice, position limits, quadratic optimization

JEL Classification: G11, G12

Suggested Citation

Guasoni, Paolo and Guasoni, Paolo and Mayerhofer, Eberhard and Zhao, Mingchuan, Options Portfolio Selection with Position Limits (November 28, 2022). Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 22-10, Available at SSRN: https://ssrn.com/abstract=4287555 or http://dx.doi.org/10.2139/ssrn.4287555

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

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

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

Eberhard Mayerhofer

University of Limerick - Department of Mathematics and Statistics ( email )

Castletroy, Co
Limerick
Ireland

Mingchuan Zhao

University of Limerick - Department of Mathematics and Statistics ( email )

Castletroy, Co
Limerick
Ireland
0833479142 (Phone)

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