Performance of Option Trading Strategies: Evidence for Individual Stocks and the OBX During 2005-2015

In this paper, we examine risk and return characteristics of some of the more popular option trading strategies such as: Covered calls, Covered combinations, Protective puts, Straddles, Strangles and Butterfly spreads. Long stocks are included as a benchmark. We contribute to a growing part of the literature that examines in detail risk and return characteristics of well-known trading strategies; see Eckbo and Ødegård (2015). We also contribute to Hemler and Miller (2015) by investigating a different market and a different time period. Our sample includes the largest stocks on the OSE together with the corresponding options. As implied volatility has been highlighted in prior literature as an important aspect of trading options, we have included this as a signal for a trading rule used for the last 3 of the said strategies. The results are presented in terms of risk-adjusted performance measures, namely: Sharpe ratio, Jensen’s alpha and Information ratio. We find that the Covered call is the only strategy the generally outperform the long stock strategy, which in turn outperform the rest of the 5 strategies, and that implied volatility fails to signal the strategies into outperforming the others