2017/02/01 by José Afonso Faias, Pedro Santa-Clara, Pedro Santa‐Clara · 2 citations
Economics, Econometrics and Finance · #Stochastic processes and financial applications #Financial Markets and Investment Strategies #Capital Investment and Risk Analysis
paper · doi:10.1017/s0022109016000831
Traditional methods of asset allocation (such as mean–variance optimization) are not adequate for option portfolios because the distribution of returns is non-normal and the short sample of option returns available makes it difficult to estimate their distribution. We propose a method to optimize a portfolio of European options, held to maturity, with a myopic objective function that overcomes these limitations. In an out-of-sample exercise incorporating realistic transaction costs, the portfolio strategy delivers a Sharpe ratio of 0.82 with positive skewness. This performance is mostly obtained by exploiting mispricing between options and not by loading on jump or volatility risk premia.