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Returns to trading portfolios of FTSE 100 index options

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  • Xiaoquan Liu

Abstract

It has been argued that the persistent mispricing of options, especially the overpricing of out-of-money put options, is a major reason for the often observed negative skewness in the risk-neutral price distributions of equity indices. This article investigates whether the Financial Times Stock Exchange 100 Shares index put options are overpriced compared with call options of the same moneyness and, if they are, whether this gives rise to profit opportunities in the market. By testing the weekly returns to delta and vega neutral portfolios with long positions in put options and short positions in call options, we find that the returns are consistently negative. However, short selling the portfolios is unlikely to give arbitrage profits due to the bid--ask spread.

Suggested Citation

  • Xiaoquan Liu, 2007. "Returns to trading portfolios of FTSE 100 index options," Applied Financial Economics, Taylor & Francis Journals, vol. 17(15), pages 1211-1225.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:15:p:1211-1225
    DOI: 10.1080/09603100600905079
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    References listed on IDEAS

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    1. Steven A. Weinberg, 2001. "Interpreting the volatility smile: an examination of the information content of option prices," International Finance Discussion Papers 706, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Elyas Elyasiani & Luca Gambarelli & Silvia Muzzioli, 2015. "Towards a skewness index for the Italian stock market," Department of Economics 0064, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    2. Elyas Elyasiani & Luca Gambarelli & Silvia Muzzioli, 2016. "Fear or greed? What does a skewness index measure?," Department of Economics 0102, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    3. Elyas Elyasiani & Luca Gambarelli & Silvia Muzzioli, 2018. "The use of option prices in order to evaluate the skewness risk premium," Department of Economics 0132, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    4. Shackleton, Mark B. & Voukelatos, Nikolaos, 2013. "Hedging efficiency in the Greek options market before and after the financial crisis of 2008," Journal of Multinational Financial Management, Elsevier, vol. 23(1), pages 1-18.
    5. Hong, Hui & Sung, Hao-Chang & Yang, Jingjing, 2018. "On profitability of volatility trading on S&P 500 equity index options: The role of trading frictions," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 295-307.
    6. Chuang Yuang Lin & Dar Hsin Chen & Chin Yu Tsai, 2011. "The limitation of monotonicity property of option prices: an empirical evidence," Applied Economics, Taylor & Francis Journals, vol. 43(23), pages 3103-3113.

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