Option Strategies: Good Deals and Margin Calls
- Author(s): Santa-Clara, Pedro
- Saretto, Alessio
- et al.
We investigate the risk and return of a wide variety of trading strategies involving options on the S&P 500. We consider naked and covered positions, straddles, strangles, and calendar spreads, with different maturities and levels of moneyness. Overall, we ﬁnd that strategies involving short positions in options generally compensate the investor with very high Sharpe ratios, which are statistically signiﬁcant even after taking into account the non-normal distribution of returns. Furthermore, we ﬁnd that the strategies’ returns are substantially higher than warranted by asset pricing models. We also ﬁnd that the returns of the strategies could only be justiﬁed by jump risk if the probability of market crashes were implausibly higher than it has been historically. We conclude that the returns of option strategies constitute a very good deal. However, exploiting this good deal is extremely diffcult. We ﬁnd that trading costs and margin requirements severely condition the implementation of option strategies. Margin calls force investors out of a trade precisely when it is losing money. Taking margin calls into account turns the Sharpe ratio of some of the best strategies negative.