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The traders' rule and long‐term options

Author

Listed:
  • Sol Kim
  • In Jung Song

Abstract

Studies show that option traders prefer using the traders' rule to price short‐term options over more mathematically sophisticated models. This study uses Standard & Poor's 500 index option data to determine whether the traders' rule also outperforms mathematically more sophisticated models in pricing long‐term options. The results show that, while the traders' rule still enjoys smaller pricing errors for short‐term options, more mathematically sophisticated models perform better for long‐term options. This result may reflect the greater liquidity of short‐term options, which are far more actively traded than longer‐term options.

Suggested Citation

  • Sol Kim & In Jung Song, 2021. "The traders' rule and long‐term options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(3), pages 406-436, March.
    • Handle: RePEc:wly:jfutmk:v:41:y:2021:i:3:p:406-436
    DOI: 10.1002/fut.22170
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    References listed on IDEAS

    as
    1. Sol Kim, 2009. "The performance of traders' rules in options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(11), pages 999-1020, November.
    2. Youngsoo Choi & SoonChan Ok, 2012. "Effects of rollover strategies and information stability on the performance measures in options markets: An examination of the KOSPI 200 index options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(4), pages 360-388, April.
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