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Covered call writing in a cumulative prospect theory framework

Author

Listed:
  • Martina Nardon

    (Department of Economics, CÃ Foscari University Of Venice)

  • Paolo Pianca

    (Department of Economics, CÃ Foscari University Of Venice)

Abstract

The covered call writing, which entails selling a call option on one's underlying stock holdings, is perceived by investors as a strategy with limited risk. It is a very popular strategy used by individual, professional and institutional investors; moreover, the CBOE developed the Buy Write Index (BXM) which tracks the performance of a synthetic covered call strategy on the S&P500 Index. Previous studies analyze behavioral aspects of the covered call strategy, indicating that hedonic framing and risk aversion may explain the preference of such a strategy with respect to other designs. In this contribution, following this line of research, we extend the analysis and apply Cumulative Prospect Theory in its continuous version to the evaluation of the covered call strategy and study the effects of alternative framing.

Suggested Citation

  • Martina Nardon & Paolo Pianca, 2016. "Covered call writing in a cumulative prospect theory framework," Working Papers 2016:35, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2016:35
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Behavioral Finance; Cumulative Prospect Theory; Hedonic Framing; Options Trading Strategies;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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