Option Strategies: Good Deals and Margin Calls

Saretto, Alessio; Santa-Clara, Pedro

doi:10.2139/ssrn.681643

Option Strategies: Good Deals and Margin Calls

EFA 2006 Zurich Meetings

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: 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