Option Strategies Evaluation

Abstract

This article proposes to minimize risk and maximize return using various stop-loss values for fourteen major strategies involving options. The following eight ‘option combination strategies’: “covered call, protective put, protective collar, straddle, strangle, butterfly, bear call spread and ratio call spread” along with six ‘individual option strategies’: “ATM call, OTM call, ITM call, ATM put, OTM put and ITM put” are examined by forming their time series of returns. For all the strategies means (return) and standard deviations (risk) are calculated using one month (near-month), one week (expiry-week), two months (next-month) and three months (far-month) to expiry options. The objective is to find an optimum value of stop-loss that may be employed by an investor every month to avoid superfluous losses and lessen uncertainty. Also, the performance of all the strategies is examined in the bearish and bullish markets from January 2002-December 2014 by performing their risk-return analysis.