Evaluation of Investment Strategies with Options

Ana Cristina Fernandes, Carlos Machado-Santos
2002 Social Science Research Network  
The financial literature has revealed that option strategies originate asymmetric return distributions, providing new investment opportunities, especially in the control and reduction of risk. In this way, it seems important to evaluate the performance of investment strategies that result from the combination of stock and option positions. On the other hand, given the inadequacy of the measures based upon mean and variance, we highlight the work of Leland (1999), which suggests a modification
more » ... ts a modification of the traditional risk measure (beta) of CAPM to incorporate other moments of the return distributions. In this context, we applied this methodology on six dynamic hedging strategies with options on the Index FTSE 100 (covered calls at-, in-and out-of-the-money and protective puts at-, in-and outof-the-money), in the sense of evaluating its performance. The results indicate that the new risk measure is more statistical significant than the traditional beta of CAPM, for that the information supplied by the measure of the performance (modified alpha) seems to be more reliable. On the other hand, the values of modified alphas reveal that these dynamic strategies result in excess returns close to zero (as theoretically expected), denouncing that the market price of these options appears to be in equilibrium (the options seem to be correctly priced).
doi:10.2139/ssrn.313978 fatcat:y2vnak6uefgqhkfkfh2wdiphza