infonet-economy

Puts and calls on S&P500 futures are bought and sold for various purposes including speculation, hedging and portfolio insurance. We investigate the rate of return from buying or selling these options from the start of options trading in 1985 until 2010. These rates of return are variable and depend upon the trading horizons, the level of the VIX volatility index, whether the options are in or out or near the money and whether the market is rallying or in a crash mode. We specifically study the 2007-9 stock market crash period and various bullish market periods. Our results show that while selling out-of-the-money options is generally profitable, it sometimes generates steep losses. Hence, speculators trying to take advantage of mispriced options are wise to utilize accurate prediction models, devise variable types of hedged strategies and be well capitalized to weather market storms and have strategies in place to deal with
them.