Return and risk analysis of the S&P 500 index options strategies

Abstract

This paper mainly illustrates a risk and return framework to compares the relative performance of S&P500 index options strategies. I use net raw returns to obtain the average daily return and standard deviation for each strategy with the construction of constant moneyness and expiration date. Based on the S&P500 index’s market movement during a two year empirical period (1st September, 2009 to 31st August, 2011), I find that strategy of a covered call has the highest Sharpe ratio while a straddle has the lowest Sharpe ratio. In addition, longing a call is more risky but typically has higher return than merely longing the underlying S&P500 index, and those volatility strategies, such as straddle, strap, strip, will probably generate negative returns when price level remains stable at most of the time.