Option Strategies: Good Deals and Margin Calls

40 Pages Posted: 25 Mar 2005

See all articles by Alessio Saretto

Alessio Saretto

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Pedro Santa-Clara

New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: January 2006

Abstract

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

Saretto, Alessio and Santa-Clara, Pedro, Option Strategies: Good Deals and Margin Calls (January 2006). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=681643 or http://dx.doi.org/10.2139/ssrn.681643

Alessio Saretto

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

800 Campbell Road
SM 31
Richardson, TX 75080
United States
972-883-5907 (Phone)

HOME PAGE: http://www.utdallas.edu/~axs125732

Pedro Santa-Clara (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Lisbon
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~psc/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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