Option Strategies: Good Deals and Margin Calls
40 Pages Posted: 25 Mar 2005
Date Written: January 2006
We investigate the risk and return of a variety of trading strategies involving options on the S&P 500. Overall, we find that strategies that short options constitute very good deals.
However, exploiting these good deals can be extremely difficult. Trading costs and margin requirements severely condition the implementation of the option strategies. Margin calls in particular have a double impact on trading strategies: they limit the notional amount of short-sale positions and they force investors out of trades precisely when they are losing money. These frictions limit the capacity of sophisticated investors to arbitrage away the mispricings in options markets.
Keywords: Option strategies, margin requirements
JEL Classification: G12, G13
Suggested Citation: Suggested Citation