Equity Options

Are value (growth) investors stolid conservatives (wild risk-takers)? If so, is there a way to trade on the difference in behavioral preferences? In their September 2006 paper entitled “Risk Aversion and Clientele Effects”, Douglas Blackburn, William Goetzmann and Andrey Ukhov compare the risk preferences of value and growth investors by examining: (1) option prices for pairs of value-growth indexes, and (2) funds flows for value and growth mutual funds. They further investigate whether any profitable options trading strategies devolve from the difference in risk preferences. Using recent data for five value-growth index pairs and for several value and growth mutual funds, they find that: Keep Reading

Does a willingness to pay more or less for options than indicated by recent actual levels of stock return volatility reflect the current level of investor/trader risk aversion? In other words, does the gap between option-implied and historical stock return volatilities provide a tradable measure of fearfulness? In the September 2006 draft of their paper entitled “Expected Stock Returns and Variance Risk Premia”, Tim Bollerslev, George Tauchen and Hao Zhou investigate the predictive power of the implied-historical volatility gap for future stock returns. Using monthly data for the S&P 500 index (VIX for implied volatility and a summation of five-minute squared returns for historical volatility) for the period 1990-2005, they find that: Keep Reading

In the January 2006 revision of their paper entitled “Is There Money to be Made Investing in Options? A Historical Perspective”, James Doran and Andy Fodor examine the return and risk of a variety of option strategies for a typical investor. Specifically, they assess whether any of 12 S&P 500 index options trading strategies as marginal investments within a larger index portfolio would have enhanced buy-and-hold returns over long periods. They chose the 12 strategies in accordance with the basic strategies outlined by the Chicago Board of Options Exchange. Where historical options price data is unavailable, they estimate plausible reconstructions and transaction costs. Using two long periods (1970-2004 and 1995-2004) and focusing on overall portfolio returns, they find that: Keep Reading