This study examines the pattern of stock option time value decay and the implications of the time value decay pattern for option writing strategies. I also consider the returns to various options writing strategies. The central question is whether option writers can utilize a writing strategy that captures the time value of options as revenue to cover their risks and provides return on their investments. Using transaction data, I find that the time value of options that are near-the-money decays at a decreasing rate. The implications of this result are that a significant portion of the time value of near-the-money options decays in the early days of writing an option and the decay slows down as time to expiry approaches. This motivates us to compare over the same holding periods the writing returns of options with long times to expiry with the returns of options with short times to expiry. Overall, the results suggest that trading of options face significant transaction costs and it is mainly motivated by hedging or speculation as I did not find a systematic way to profit from option writing strategies.<p> In addition, I examine the impact of market sentiment on the time value of options. The period of the study includes a sub-period when the general trend in the stock market was positive and another sub-period when the trend was negative. In particular, I study the price of puts relative to the price of calls during these two distinct market periods. I find that during bear markets both call and put options are more expensive than call and put options during bull markets. Yet, the ratio of put premiums to call premiums during rising markets is generally higher than the same ratio during bear markets. This observation suggests that speculators may be the dominant traders in options markets. Overall, I find that option writing strategies are not profitable. One of the reasons for this observation is transaction costs, which are significant in all the strategies that I examine. The bid-ask spread in the options market is large in comparison to the bid-ask spread in the underlying stock market.

This study examines the pattern of stock option time value decay and the implications of the time value decay pattern for option writing strategies. I also consider the returns to various options writing strategies. The central question is whether option writers can utilize a writing strategy that captures the time value of options as revenue to cover their risks and provides return on their investments. Using transaction data, I find that the time value of options that are near-the-money decays at a decreasing rate. The implications of this result are that a significant portion of the time value of near-the-money options decays in the early days of writing an option and the decay slows down as time to expiry approaches. This motivates us to compare over the same holding periods the writing returns of options with long times to expiry with the returns of options with short times to expiry. Overall, the results suggest that trading of options face significant transaction costs and it is mainly motivated by hedging or speculation as I did not find a systematic way to profit from option writing strategies.<p> In addition, I examine the impact of market sentiment on the time value of options. The period of the study includes a sub-period when the general trend in the stock market was positive and another sub-period when the trend was negative. In particular, I study the price of puts relative to the price of calls during these two distinct market periods. I find that during bear markets both call and put options are more expensive than call and put options during bull markets. Yet, the ratio of put premiums to call premiums during rising markets is generally higher than the same ratio during bear markets. This observation suggests that speculators may be the dominant traders in options markets. Overall, I find that option writing strategies are not profitable. One of the reasons for this observation is transaction costs, which are significant in all the strategies that I examine. The bid-ask spread in the options market is large in comparison to the bid-ask spread in the underlying stock market.

Författarens syfte med studien är att undersöka om optionsstrategin covered call, kan generera bättre riskjusterad avkastning än jämförelseindex. Författaren bygger den kvantitativa undersökningen på sekundärdata som inhämtats från flera leverantörer av finansiell datahistorik. Ekonomisk teori som tillämpas är teorin om effektiva marknader, finansiell beteendevetenskap samt prospektteorin. Resultatet påvisar en riskjusterad högre avkastning för covered call-strategin. Adderas uppskattade transaktionskostnader visar resultatet att covered call har lägre standardavvikelse medan avkastningen är densamma som index.

Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2014. / The use of a Covered Call strategy has long been favoured by investors the world over for its potential to enhance yield in a long-only equity portfolio. There already exists a wealth of research examining the risk and return features and theories of this strategy. This paper aims to contribute to this debate by conducting research that is specific to the South African equity market and considered from the perspective of a retail investor, particularly by tracking the negative friction induced by transaction costs. It also seeks to answer the question of which Covered Call strategies provide the best risk-adjusted returns by pricing various expiry range and moneyness combinations over differing market trend phases during a 13-year period of trade on the JSE.