Topic
Straddle
About: Straddle is a research topic. Over the lifetime, 276 publications have been published within this topic receiving 4780 citations.
Papers published on a yearly basis
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Papers
TL;DR: The authors examines expected option returns in the context of mainstream asset pricing theory and shows that option risk can be thought of as consisting of two separable components, i.e., leverage effect and systematic stochastic volatility.
Abstract: This paper examines expected option returns in the context of mainstream assetpricing theory. Under mild assumptions, expected call returns exceed those of the underlying security and increase with the strike price. Likewise, expected put returns are below the risk-free rate and increase with the strike price. S&P index option returns consistently exhibit these characteristics. Under stronger assumptions, expected option returns vary linearly with option betas. However, zero-beta, at-the-money straddle positions produce average losses of approximately three percent per week. This suggests that some additional factor, such as systematic stochastic volatility, is priced in option returns. ASSET-PRICING THEORY CLAIMS that options, like all other risky securities in an economy, compensate their holders with expected returns that are in accordance with the systematic risks they require their holders to bear. Options which deliver payoffs in bad states of the world will earn lower returns than those that deliver their payoffs in good states. The enormous popularity of option contracts has arisen, in part, because options allow investors to precisely tailor their risks to their preferences. With this in mind, a study of option returns would appear to offer a unique opportunity in which to investigate what kinds of risks are priced in an economy. However, although researchers have paid substantial attention to the pricing of options conditional on the prices of their underlying securities, relatively little work has focused on understanding the nature of option returns. Understanding option returns is important because options have remarkable risk-return characteristics. Option risk can be thought of as consisting of two separable components. The first component is a leverage effect. Because an option allows investors to assume much of the risk of the option’s underlying asset with a relatively small investment, options have characteristics similar to levered positions in the underlying asset. The Black‐ Scholes model implies that this implicit leverage, which is ref lected in option betas, should be priced. We show that this leverage should be priced under
754 citations
TL;DR: In this article, the authors examine expected option returns in the context of mainstream asset pricing theory and find that under mild assumptions, call options have expected returns which exceed those of their underlying security and which are increasing in their strike prices.
Abstract: This paper examines expected option returns in the context of mainstream asset pricing theory. Under mild assumptions, call options have expected returns which exceed those of their underlying security and which are increasing in their strike prices. Likewise, put options have expected returns which are below the risk-free rate and which are also increasing in their strike prices. Across a variety of time periods and return frequencies, S&P 500 and 100 index option returns strongly exhibit these characteristics. Under stronger assumptions, expected option returns are a linear function of option betas. Fama-MacBeth-style option return regressions produce risk premia close to the expected market return. However, the regression intercepts are significantly below zero. As a result, zero-beta, at-the-money straddle positions produce average losses of approximately three percent per week. Zero-beta straddles in other markets also lose money consistently. These findings suggest that some additional factor, such as systematic stochastic volatility, is priced in option returns.
655 citations
TL;DR: In this paper, the authors examined the de-diversification activity of publicly held American firms from 1985 to 1994 and found that managers of such firms face pressure from analysts to dediversify so that their stock is more easily understood.
Abstract: The issue of corporate control is examined through an analysis of the de-diversification activity of publicly held American firms from 1985 to 1994. Prominent accounts of such behavior depict newly powerful shareholders as having demanded a dismantling of the inefficient, highly diversified corporate strategies that arose in the late 1950s and the 1960s. This paper highlights an additional factor that spurred such divestiture: the need to present a coherent product identity in the stock market. It is argued that because they straddle the industry categories that investors—and securities analysts, who specialize by industry—use to compare like assets, diversified firms hinder efforts at valuing their shares. As a result, managers of such firms face pressure from analysts to dediversify so that their stock is more easily understood. Results indicate that, in addition to such factors as weak economic performance, de-diversification is more likely when a firm's stock price is low and there is a significant mi...
631 citations
TL;DR: In this paper, the authors compare historical option returns to those generated by commonly used option pricing models and find that the most puzzling finding in the existing literature, the large returns to writing out-of-themoney puts, is not even inconsistent with the Black-Scholes model.
Abstract: This paper studies the returns from investing in index options. Previous research documents significant average option returns, large CAPM alphas, and high Sharpe ratios, and concludes that put options are mispriced. We propose an alternative approach to evaluate the significance of option returns and obtain different conclusions. Instead of using these statistical metrics, we compare historical option returns to those generated by commonly used option pricing models. We find that the most puzzling finding in the existing literature, the large returns to writing out-of-themoney puts, is not even inconsistent with the Black-Scholes model. Moreover, simple stochastic volatility models with no risk premia generate put returns across all strikes that are not inconsistent with the observed data. At-the-money straddle returns are more challenging to understand, and we find that these returns are not inconsistent with explanations such as jump risk premia, Peso problems, and estimation risk.
324 citations
TL;DR: In this article, the authors present an algorithm for the valuation and optimal operation of natural gas storage facilities using real options theory to derive nonlinear partial-integro-differential equations (PIDEs), the solution of which gives both valuation and operating strategies for these facilities.
Abstract: In this article, we present an algorithm for the valuation and optimal operation of natural gas storage facilities. Real options theory is used to derive nonlinear partial-integro-differential equations (PIDEs), the solution of which give both valuation and optimal operating strategies for these facilities. The equations are designed to incorporate a wide class of spot price models that can exhibit the same time-dependent, mean-reverting dynamics, and price spikes as those observed in most energy markets. Particular attention is paid to the operational characteristics of real storage units. These characteristics include working gas capacities, variable deliverability and injection rates, and cycling limitations. We illustrate the model with a numerical example of a salt cavern storage facility that clearly shows how a gas storage facility is like a financial straddle with both put and call properties. Depending on the amount of gas in storage the relative influence of the put and call components vary. © 2009 Wiley Periodicals, Inc. Naval Research Logistics 2009
200 citations
Related Topics (5)
Performance Metrics
| Year | Papers |
|---|---|
| 2025 | 25 |
| 2024 | 35 |
| 2023 | 53 |
| 2022 | 71 |
| 2021 | 15 |
| 2020 | 16 |