On profitability of volatility trading on S&amp;P 500 equity index options: The role of trading frictions

Hong, Hui; Sung, Hao-Chang; Yang, Jingjing

doi:10.1016/j.iref.2017.07.012

Cited by 8 publications

(4 citation statements)

References 28 publications

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“…Thus, Chaput and Ederington (2003) proved the appropriateness of multileg option strategies to handle the price risk during unpredicted movements in the underlying equity market. Hong et al (2018) found that the short straddle strategy was more profitable during the non-inclusion of trading frictions. Call and put spread is the most commonly used directional strategy in the FTSE-100 European style index options market (Fahlenbrach & Sandås, 2010).…”

Section: Proposed Neuro-specific Options Volatility Trading Strategiesmentioning

confidence: 99%

“…The chances of unlimited loss on unpredictable price movements in the underlying asset market can be effectively mitigated using the combination options trading strategies (Jose & Varghese, 2021a, 2021b; Swartz, 2013). Hong et al (2018) and Mehrani et al (2016) substantiated the suitability of options volatility trading strategies to generate abnormal gains during recessions or upswings in the financial markets. The conventional volatility trading strategies, namely, straddle, strangle, and butterfly strategies ensure profitability under specific market conditions and accumulate losses when the market reverses (Kumar, 2007).…”

Section: Introductionmentioning

confidence: 98%

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Beware of Extreme Investor Sentiments! Indian Evidence on the Performance of Neuro-specific Options Volatility Trading Strategies on the Facets of COVID-19

Royit

Jose

Varghese

2023

Journal of Emerging Market Finance

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This study investigates the dynamic relationship between noise trader sentiment and excessive volatility in the Indian financial market during the COVID-19 outbreak. It proposes novel options trading strategies to ensure profitability in times of irrational exuberance and to satisfy diverse investment requirements of volatility traders, which arise from the varying levels of stimulating neurotransmitters, namely dopamine and serotonin in the human body. Empirical results show that the incremental information content of sentiment measures is vital in forecasting future volatility and the proposed options trading strategies effectively accomplish the neuro-specific intentions of the traders during extreme volatility in the Indian equity market. JEL Codes: G12, G13

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Section: Proposed Neuro-specific Options Volatility Trading Strategiesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 98%

Beware of Extreme Investor Sentiments! Indian Evidence on the Performance of Neuro-specific Options Volatility Trading Strategies on the Facets of COVID-19

Royit

Jose

Varghese

2023

Journal of Emerging Market Finance

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“…Santa-Clara and Saretto (2009), Do et al (2016) and Hong et al (2018) focussed on the real-world implementation of these strategies by incorporating transaction costs such as bid-ask spreads and margin requirements. They documented a substantial reduction in the profitability of the short volatility strategies after inclusion of transaction costs and concluded that profitable opportunities cannot be exploited easily.…”

Section: Review Of Literature and Research Gapmentioning

confidence: 99%

The Profitability of Volatility Trading on Exchange-traded Dollar-rupee Options: Evidence of a Volatility Risk Premium?

Bhat¹

2021

Global Business Review

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This article examines the profitability of short volatility strategies in the exchange-traded USDINR options market. Returns from delta-hedged short positions in straddles, strangles and individual call and put options are examined across different trading horizons and volatility regimes. The study finds that short volatility strategies yield significant mean and median returns regardless of the trading horizon and option moneyness before considering transaction costs. This is suggestive of a volatility risk premium priced in USDINR options. However, the returns are found to be insignificant and even negative after accounting for trading costs such as bid-ask spreads and brokerage. The study concludes that although USDINR options appear to be overpriced because of the volatility risk premium, short option strategies can be profitably exploited only by market makers and institutional investors facing low spreads and funding costs. The findings are suggestive of an informationally efficient market.

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“…Simon (2017) identified profitable VIX option trading strategies based on buying VIX options to exploit the tendency of VIX futures to rise and fall when the VIX futures curve is in backwardation and in contango, respectively and the tendency of VIX futures ex ante volatility premiums to spike and then revert to more typical levels. Hong et al (2018) examined the profitability of volatility trading on S&P 500 equity index options in time-varying market conditions, with a particular focus on evaluating the authenticity of risk-adjusted returns. While significant profits are available on strategies that involve writing put options, their findings cast doubt on whether these profits can be genuinely attained in practice.…”

Section: Literature Reviewmentioning

confidence: 99%

Options trading strategy based on ARIMA forecasting

Rostan

Nurunnabi

2020

PRR

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Purpose The purpose of this paper is to illustrate a profitable and original index options trading strategy. Design/methodology/approach The methodology is based on auto regressive integrated moving average (ARIMA) forecasting of the S&P 500 index and the strategy is tested on a large database of S&P 500 Composite index options and benchmarked to the generalized auto regressive conditional heteroscedastic (GARCH) model. The forecasts validate a set of criteria as follows: the first criterion checks if the forecasted index is greater or lower than the option strike price and the second criterion if the option premium is underpriced or overpriced. A buy or sell and hold strategy is finally implemented. Findings The paper demonstrates the valuable contribution of this option trading strategy when trading call and put index options. It especially demonstrates that the ARIMA forecasting method is a valid method for forecasting the S&P 500 Composite index and is superior to the GARCH model in the context of an application to index options trading. Originality/value The strategy was applied in the aftermath of the 2008 credit crisis over 60 months when the volatility index (VIX) was experiencing a downtrend. The strategy was successful with puts and calls traded on the USA market. The strategy may have a different outcome in a different economic and regional context.

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On profitability of volatility trading on S&P 500 equity index options: The role of trading frictions

Cited by 8 publications

References 28 publications

Beware of Extreme Investor Sentiments! Indian Evidence on the Performance of Neuro-specific Options Volatility Trading Strategies on the Facets of COVID-19

Beware of Extreme Investor Sentiments! Indian Evidence on the Performance of Neuro-specific Options Volatility Trading Strategies on the Facets of COVID-19

The Profitability of Volatility Trading on Exchange-traded Dollar-rupee Options: Evidence of a Volatility Risk Premium?

Options trading strategy based on ARIMA forecasting

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