Option Strategies: Good Deals and Margin Calls

40 Pages Posted: 25 Mar 2005

See all articles by Alessio Saretto

Alessio Saretto

Federal Reserve Banks - Federal Reserve Bank of Dallas

Pedro Santa-Clara

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

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Pedro Santa-Clara (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

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

National Bureau of Economic Research (NBER)

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United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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