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.
| Identifer | oai:union.ndltd.org:USASK/oai:usask.ca:etd-06102010-234455 |
| Date | 24 June 2010 |
| Creators | Zhou, Mo |
| Contributors | Tannous, George, Wilson, Craig, Racine, Marie |
| Publisher | University of Saskatchewan |
| Source Sets | University of Saskatchewan Library |
| Language | English |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://library.usask.ca/theses/available/etd-06102010-234455/ |
| Rights | restricted, I hereby certify that, if appropriate, I have obtained and attached hereto a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to University of Saskatchewan or its agents the non-exclusive license to archive and make accessible, under the conditions specified below, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report. |
Page generated in 0.002 seconds