Performance of two zero-cost derivative strategies under different market conditions
Abstract
Zero-cost collars are option-based strategies which—by matching prices
received and paid for the component derivatives—provide costless protection for
stock or index investments. The investors’ risk appetite determines a return floor by
selecting a relevant put strike and the associated call strike (reverse-engineered
from the [known] call value) establishes the index return’s cap. Increasing the floor
increases the cap and vice versa. A butterfly strategy involves the purchase of two
call options and the sale of two put options. By choosing appropriate strikes, this
assembly may also be structured such that it provides a costless investment
strategy. Rolling strategies involve the purchase and later sale of the derivative
components at a chosen frequency (usually monthly): but the literature has, to
date, not explored the potential outcomes for such procedures. Using recent historical
data, the effect of different strategy maturities and strike prices on potential
index returns (from several jurisdictions) are investigated. The more profitable
strategy is strongly influenced by the prevailing market conditions
URI
http://hdl.handle.net/10394/31715https://doi.org/10.1080/23322039.2018.1492893 https://www.tandfonline.com/doi/full/10.1080/23322039.2018.1492893
https://www.tandfonline.com/doi/abs/10.1080/23322039.2018.1492893