Option Strategies Research Articles

Performance of strip option strategy on the Indian capital market

The aim of this study is to analyse the performance of two different strip option strategies are analysed on the Indian stock market index, Nifty. The strategies on the data ranges from 2007-2020 on monthly bases. Long and short strip option strategies have been used in this analysis. By using newly developed pay-off formulas for strip option strategies, the results have been analysed on the basis of monthly success rate and profitability (in terms of points earned or lost in Nifty). Results of the higher success rate and better profitability of short strip option strategy indicate that volatility of Nifty has less bullish than bearish behaviour and Nifty has range-bound characteristics. Because of the higher success rate and better profitability, short strip option strategy can be consistently applied by traders on the Nifty for profit generation. For any trader, these findings will be useful for trading in Nifty. The pay-off formulas of strip option strategies have never been reported in any literature, hence these pay-off formulas will also help the academicians to calculate and understand the profit/loss on any index.

Forecasting Implied Volatility Smile Surface via Deep Learning and Attention Mechanism

The implied volatility smile surface is the basis of option pricing, and the dynamic evolution of the option volatility smile surface is difficult to predict. In this paper, attention mechanism is introduced into LSTM, and a volatility surface prediction method combining deep learning and attention mechanism is pioneeringly established. LSTM's forgetting gate makes it have strong generalization ability, and its feedback structure enables it to characterize the long memory of financial volatility. The application of attention mechanism in LSTM networks can significantly enhance the ability of LSTM networks to select input features. The experimental results show that the two strategies constructed using the predicted implied volatility surfaces have higher returns and Sharpe ratios than that the volatility surfaces are not predicted. This paper confirms that the use of AI to predict the implied volatility surface has theoretical and economic value. The research method provides a new reference for option pricing and strategy.

Hedging Option Greeks: Risk Management Tool for Portfolio of Futures & Options

Options are financial derivatives which are used as risk management tools for hedging the portfolios. The options traders can play safely in the volatile markets with the help of knowledge of the Greeks associated with the options. This study is focused at providing the knowledge of the Greeks and their implementation as risk management tools so as to enhance gains or avoid losses. Delta, Vega and Theta of the options as well as the other position. Greeks are associated with any option strategy and they equally impact the portfolio. The knowledge of the impact of Greeks on different strategies will lead to determine how much risk and the potential reward is associated with the portfolio. The study will focus on getting instrument rated with options trading perspective, in order to make investor handle any strategy scenario and hedge the risk so as to gain good rewards. This will also guide the investor to determine the risk-reward ratio, prior to entry in the trade. Options trading can be taken to the next level with the help of understanding of Greeks and their Hedging techniques. This knowledge will enhance the existing knowledge in context to the options hedging and will lead to the benefits in trading if Delta-Gamma neutralised strategy or Delta-Vega neutralised strategy will be employed along with the best market movement suited option strategy.

Returns to Option Strategies Following Class Action Lawsuits

Turmoil and uncertainty confront firms when they are named as defendants in class action lawsuits. In this article, we consider whether option markets interpret the implications of these dramatic corporate events for mid-to-long term performance. In particular, we consider relatively simple, long, volatility-based combined option positions. We find consistent, positive, and frequently significant returns to option straddle and strangle positions held from six months to 1.5 years after a firm is targeted in a class action. This may be indicative of under appreciation, in the option markets, for the dichotomous nature of firm stock price performance as the class action proceeds toward a resolution. TOPICS:Legal/regulatory/public policy, performance measurement, volatility measures, derivatives, options Key Findings • Long, volatility-based straddle and strangle option positions are a potentially profitable strategy if stock markets fail to appreciate the dichotomous nature of price movements after class action lawsuits begin. • Straddles and strangles are consistently profitable for holding periods between six months and 1.5 years if created after the initial filing of a class action lawsuit. • The median time from the initial filing of a class action lawsuit until resolution is 717 days.

The “Superior Performance” of Covered Calls on the S&P 500: Rethinking an Anomaly

This study shows that previous findings of the superior performance of covered calls on the S&P 500 are spurious because they ignore or dismiss skewness. While academics have previously identified this problem, the financial industry has largely ignored it. The authors show how the problem manifests in that traditional performance measures used in other studies show superior performance even with correctly priced options. They present two new estimates of covered call alphas—one that embeds a benchmark and the other that subtracts the benchmark—and find little basis for these prior claims. The authors also identify a bias in previous studies in which the chosen holding period disguises the effect of skewness. Their results, which are supported in both monthly and daily data, are consistent with intuition that holding the index and selling these widely traded options cannot generate alpha, as has been highly promoted in several practitioner articles. TOPICS:Options, performance measurement, exchange-traded funds and applications Key Findings • The documented abnormal performance of covered call writing is largely driven by disregard of skewness. • There are simple measures that can adjust the alpha of an option strategy for skewness. • The positioning of the holding period during the expiration month can disguise the problem.

A Latent Factor Model for the Cross-Section of Option Returns

Due to their short lifespans and migrating moneyness, options are notoriously difficult to study with the factor models commonly used to analyze the risk-return trade-off in other asset classes. Instrumented principal components analysis solves this problem by tracking contracts in terms of their pricing-relevant characteristics via time-varying latent factor loadings. We find that a model with three latent factors prices the cross-section of option returns and explains more than 85% of the variation in a panel of monthly S&P 500 option returns from 1996 to 2017. In particular, we show that the IPCA factors can be rationalized via an economically plausible three-factor model consisting of a level, slope and skew factor. Finally, out-of-sample trading strategies based on insights from the IPCA model have significant alpha over previously studied option strategies. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Equity Acquisition by MNE Partners of IJVs in China

This paper traces the roots of post-formation equity share changes of international joint venture (IJV) in China. Using the longitudinal Chinese industrial survey database published by Chinese National Bureau of Statistics (CNBS), we provide empirical evidence that MNE partners increase the probability of acquiring the additional equity shares in IJVs at the low ownership level and in response to positive market cue. This indicates real option theory conforms with this study and explains MNEs' related investment strategies in China. In addition we find that ownership level, experience and modernized local partners help MNE partners to respond better to market cue in exercising the option, because each of these firm heterogeneities corresponds to bargaining power, knowledge-based capability and speed for MNEs' real option strategy.

Cost-Effectiveness of Preemptive Switching to Efavirenz-Based Antiretroviral Therapy for Children With Human Immunodeficiency Virus.

BackgroundThe NEVEREST-3 (South Africa) and MONOD-ANRS-12206 (Côte d’Ivoire, Burkina Faso) randomized trials found that switching to efavirenz (EFV) in human immunodeficiency virus–infected children >3 years old who were virologically suppressed by ritonavir-boosted lopinavir (LPV/r) was noninferior to continuing o LPV/r. We evaluated the cost-effectiveness of this strategy using the Cost-Effectiveness of Preventing AIDS Complications–Pediatric model.MethodsWe examined 3 strategies in South African children aged ≥3 years who were virologically suppressed by LPV/r: (1) continued LPV/r, even in case of virologic failure, without second-line regimens; continued on LPV/r with second-line option after observed virologic failure; and preemptive switch to EFV-based antiretroviral therapy (ART), with return to LPV/r after observed virologic failure. We derived data on 24-week suppression (<1000 copies/mL) after a switch to EFV (98.4%) and the subsequent risk of virologic failure (LPV/r, 0.23%/mo; EFV, 0.15%/mo) from NEVEREST-3 data; we obtained ART costs (LPV/r, $6–$20/mo; EFV, $3–$6/mo) from published sources. We projected discounted life expectancy (LE) and lifetime costs per person. A secondary analysis used data from MONOD-ANRS-12206 in Côte d’Ivoire.ResultsContinued LPV/r led to the shortest LE (18.2 years) and the highest per-person lifetime cost ($19 470). LPV/r with second-line option increased LE (19.9 years) and decreased per-person lifetime costs($16 070). Switching led to the longest LE (20.4 years) and the lowest per-person lifetime cost ($15 240); this strategy was cost saving under plausible variations in key parameters. Using MONOD-ANRS-12206 data in Côte d’Ivoire, the Switch strategy remained cost saving only compared with continued LPV/r, but the LPV/r with second-line option strategy was cost-effective compared with switching.ConclusionFor children ≥3 years old and virologically suppressed by LPV/r-based ART, preemptive switching to EFV can improve long-term clinical outcomes and be cost saving.Clinical Trials RegistrationNCT01127204

Micro Small and Medium Scale Enterprises - 'Hidden and Helping Hand in Economic Growth'

Micro Small and Medium Scale Enterprises (MSMEs) generate growth and development for any economy. These enterprises are faced with a diversity of problems in India due to numerous domestic and global economic problems, and policy inconsistencies. The result is a high poverty rate. The objective of this review paper, therefore, is to critically examine the problems facing the MSMEs in India and identify the options strategies utilised by these MSMEs as demonstration alternatives. The manufacturing sector’s contribution to national income until today remains low. Major findings include lack of management skill, poor record keeping, weak access to financing, multiple taxation, and inconsistent policies. Seminars and workshops are recommended to improve MSMEs’ management capabilities, as well as the institutional coordination of the efforts of relevant agencies and institutions, and the streamlining of the myriad of taxes stifling MSMEs.

Performance expectations of basic options strategies may be different than you think

There is much empirical evidence for the existence of a negative volatility risk premium. We consider how the volatility risk premium affects the returns of portfolios implementing seven popular option strategies. We find that option selling generates substantial excess return as well as risk mitigation by providing short exposure to the volatility risk premium. Net option buying is able to protect against extreme losses; however, these losses are very infrequent and short lived. Even during these periods, the long net exposure to the volatility risk premium erodes protection as the depth and duration of the losses persist.

Effectiveness of Options Strategy Introduced by National Stock Exchange for Highest Market Capitalization of India

National stock exchange has introduced 22 stock and index option strategies for investor. In which investors can trade and book profit or loss. These 22 strategies are divided in bull and bearish strategies. 12 strategies are bull and 10 are bearish strategies. But these strategies are not defining how to enter in bull or bear strategies. This study will help how to define bull and bear strategies, and checking the strategies return, whether the return in the strategies are according to said result in strategy or not. The strategies define by national stock exchange are in predefine environment. If bear market, then invest in bear strategies and bull market then invest in bull strategies. Investing in option strategies required technical and investment experience. There are approximately 250 stock and 5 index in which investors can invest. But how to invest and when to invest in stock option is not define.

An option-theoretic model of a reputation network

ABSTRACTThis paper constructs a new theory of social networks based on reputation. The model assumes that reputation is an asset and that individuals connect by buying options on the reputation of others. In networking, individuals construct portfolios of call options to leverage the reputations of others and put options to hedge the connections with others. A network then consists of portfolios of reputation options. The option model confers advantages not present in existing models. First, the payoff to connecting is the payoff on a portfolio of reputation options. Second, the network forms as individuals take option positions; the network evolves as individuals adjust those positions. Third, networking strategies become option strategies. The model allows for insights into network structure, the price of connecting and the value of connecting.

Trading derivatives options contracts: the associated risk and potential

Learning outcomes It intends to help the learners assess the scenarios of volatility in the Indian capital market which was caused by unpredictable market forces. It also helps in understanding how analysts struggle to predict the direction of the market and what options strategies can be recommended to be deployed by the investors to maximize returns in such compelling scenarios. Case overview/synopsis This case study presents snapshots of high volatilities caused by the market and economic forces in the Indian capital market. It depicts how analysts struggled to predict the direction of the market; and how high volatility can put them in trouble. It also exemplifies as to how by selecting the apt strategies, investors maximize their immediate returns in a volatile period and can produce large returns in a short time. Complexity academic level The best time to discuss the case is during the completion of options strategies in the course of Derivatives or Portfolio/Investment Management. Supplementary materials Teaching Notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes. Subject code CSS 1: Accounting and Finance.

Payoffs from Neutral Option Strategies: A Study of USD-INR Market

Payoffs from Neutral Option Strategies: A Study of USD-INR Market

Performance Expectations of Basic Options Strategies May Be Different Than You Think

There is much empirical evidence for the existence of a negative volatility risk premium. We consider how the volatility risk premium affects the returns of portfolios implementing seven popular option strategies. We find that option selling generates substantial excess return as well as risk mitigation by providing short exposure to the volatility risk premium. Net option buying is able to protect against extreme losses, however, these losses are very infrequent and short lived. Even during these periods, the long net exposure to the volatility risk premium erodes protection as the depth and duration of the losses persist.

Aditya Birla Money: developing options of investment strategy

Subject area Financial derivative and risk management. Study level/applicability The case is intended to be used for MBA and BBA programs in the elective courses such as derivatives and risk management, financial engineering, financial risk management and portfolio management, and for executives aspiring for the fund manager position in industry. The case could also be used in management development programs on financial risk management. Case overview The case was based on the real life experience of a portfolio manager who was entrusted with the responsibility of maximizing return of the portfolio. With the backdrop of dismal performance of the portfolio, the portfolio manager is looking for opportunity in the context of declaration of result by Infosys Ltd, one of the constituents of the portfolio. So the team headed by Nirakar Chaulia was thinking of development and application of option strategies to exploit the result day (i.e. January 14, 2016) opportunity to improve the performance of the portfolio and also reduce the potential of stock price risk. Moreover, the case was designed to help the students develop and assess different option strategies based on their market intuitions. Also, students would be able to apply the option contracts for managing price risk associated with the underlying asset. Expected learning outcomes The case would prepare students to develop different strategies to be exploited in different market conditions and assess their performance. Especially, this case was designed to enable the students to understand options as a special kind of derivative in terms of trading and its payoff, how to initiate directional and volatility trading with options, how to apply options to generate income to enhance the portfolio performance and how to develop option strategies for different market conditions and assess their performance. Supplementary materials Teaching note is available for instructors only. Subject code CSS 1: Accounting and Finance.

Risk management in student-managed funds

PurposeStudent-managed investment funds typically pursue “plain vanilla” objectives. The purpose of this paper is to demonstrate the value of adding option strategies to reduce the risk of equity positions around earnings announcements. The collar strategy is one such technique with the advantages of a low net cost and limited potential losses.Design/methodology/approachThe authors provide recommendations for utilizing the collar strategy around earnings announcements. The authors also discuss how the value of this strategy is related to the literature on option pricing and earnings announcement returns.FindingsRisk management strategies can enhance the pedagogical value of student-managed investment funds. The authors document how students have successfully utilized the collar strategy to immunize risk.Originality/valueThe collar strategy can enhance the pedagogical value of student-managed investment classes in several ways. First, students learn how to implement risk reduction strategies. Second, the proper implementation of these strategies requires students to learn the complex mechanisms associated with corporate earnings dissemination and analyst coverage. This also provides an opportunity to study earnings drift, which is a persistent and economically significant financial anomaly.

Almost first-degree stochastic dominance for transformations and its application in insurance strategy

AbstractAlmost stochastic dominance is a relaxation of stochastic dominance, which allows small violations of stochastic dominance rules to avoid situations where most decision makers prefer one alternative to another but stochastic dominance cannot rank them. The authors first discuss the relations between almost first-degree stochastic dominance (AFSD) and the second-degree stochastic dominance (SSD), and demonstrate that the AFSD criterion is helpful to narrow down the SSD efficient set. Since the existing AFSD criterion is not convenient to rank transformations of random variables due to its relying heavily on cumulative distribution functions, the authors propose the AFSD criterion for transformations of random variables by means of transformation functions and the probability function of the original random variable. Moreover, they employ this method to analyze the transformations resulting from insurance and option strategy.

An Optimal Model for Water Resources Risk Hedging Based on Water Option Trading

The uncertainty of forecasted runoffs brings risks of water shortages to water users in the intake area of long-distance water transfer projects, and the uncertainty of spot market prices may cause them to buy water at high prices. In order to hedge these risks, this paper proposes a risk hedging model for decision-making in water option trading from the viewpoint of water users. With the objective of maximizing the expected revenue of water users, the proposed model was solved by an analytical method and an optimal water option strategy was obtained for the users. The proposed model is applied to an intake area of an inter-basin water transfer project in China. The results show that the proposed water option trading model can provide water users with an optimal option strategy. The optimal options trading strategy can effectively reduce the risk caused by the uncertainties of forecasted runoffs and water prices. We also explored the influence of the uncertainty degree of the forecasted runoffs and water price on the option trading strategy. The results show that the expected revenue of water users increases as the variances of the errors of forecasted runoffs and water prices increase.

Nifty Volatility Using Neutral Strategies

This research analyzes derivative strategies that have been applied on the Nifty IT index, which is one of the sectoral indexes under Nifty. It involves the application of derivative strategies on five years of historical data of the Nifty IT index and determines their profitability. Two strategies have been used for this purpose: long straddle and short straddle. The success rates of the two neutral option strategies have been computed. The research aims to identify the strategy that can be consistently applied on the Nifty IT index in the future to generate profits. Payoff graphs for the most recent months have also been generated to complement the findings of this analysis. The results suggest that the success percentage of a long straddle strategy has been around 40% and that of short straddle around 60%. The authors conclude that the market is more bearish on volatility for the Nifty IT index. The short straddle strategy was more successful than the long straddle strategy for the period studied. Therefore, of the two strategies, the short straddle seems to offer the best prospects for neutral trading on the Nifty IT index in the future.