Improving Portfolio Performance with Option Strategies: Evidence from Switzerland

Abstract

This paper investigates the performance of a global investment strategy that combines diversification and option strategies, in particular the covered call strategy, on the Swiss Exchange over the period 1989-1996. As the return distributions of portfolios including options are possibly non-normal, the mean-variance framework may not be appropriate to assess the relative performance of such portfolios. Stochastic dominance and modified betas are the alternative approaches, robust to departure from normality, used in this paper to compare the performance of portfolios. The results show that the use of option strategies consistently improves the performance of stock portfolios, even in the presence of transaction costs.