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The Profitability of Option-Based Contrarian Strategies: An Empirical Analysis

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  • Tafadzwa Mugwagwa
  • Vikash Ramiah
  • Imad Moosa

Abstract

Short-selling restrictions limit investors' opportunities to profit from contrarian strategies in equity markets. We examine the proposition that incorporating options into contrarian strategies constitute a viable alternative to investors when short-selling restrictions are in place. In particular, we combine equities with the call and put options traded on the Australian Stock Exchange to investigate the profitability of contrarian strategies in the hybrid market and options market alone. We assess the practical issues in the execution of these approaches, including testing for the effects of limited liquidity and transaction costs. We also investigate how fundamental factors (such as dividend yield, firm size, book-to-market ratio, earnings per share, price-earnings ratio, value stocks, and market conditions) affect contrarian portfolios. The results show that employing options can enhance the profitability of contrarian strategies under certain market conditions.

Suggested Citation

  • Tafadzwa Mugwagwa & Vikash Ramiah & Imad Moosa, 2015. "The Profitability of Option-Based Contrarian Strategies: An Empirical Analysis," International Review of Finance, International Review of Finance Ltd., vol. 15(1), pages 1-26, March.
    • Handle: RePEc:bla:irvfin:v:15:y:2015:i:1:p:1-26
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    File URL: http://hdl.handle.net/10.1111/irfi.12042
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    References listed on IDEAS

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    Cited by:

    1. Shi-jie Jiang & Mujun Lei & Cheng-Huang Chung, 2018. "An Improvement of Gain-Loss Price Bounds on Options Based on Binomial Tree and Market-Implied Risk-Neutral Distribution," Sustainability, MDPI, vol. 10(6), pages 1-17, June.

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