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This repository investigates several aspects of investing in standard 100-shares at-the-money call and put options with 30/91/182/365 calendar days maturity.
For each contract (standard 30/91/182/365 -day at-the-money call/put), the following attributes are computed:
- implied volatility as obtained from OptionMetrics;
- historical realised volatility computed as the sum of squared daily close-to-close returns over 30/91/182/365 days prior to the contract;
- forward-looking realised volatility computed as the sum of squared daily close-to-close returns over 30/91/182/365 days prior from the contract to the expiry date;
- realised forward price calculated as the closing price at the expiry date of the contract.
I compare implied volatility as priced in option contracts with historical realised volatility. I also compare the realised volatility from the date of options contracts to the expiry date.
Options can be used to protect a portfolio or speculate. The latter is the primal focus here.
30/60/91/182/365 -day standard option contracts by dates and type (call/put) are obtained from OptionMetrics. These records are then matched with the CRSP dataset and those records with a non-matching CUSIP dropped. Then, I use CRSP market data (price + shares outstanding) to calculate market capitalisation for each firm as of the last trading day before a calendar year. Next, the top 100 firms by market cap are selected and studied for their call and put options. The study period for all figures is 2001 to 2020.
Note: Selection of top 100 firms by market cap is solely to ensure liquidity.
Image Set here presents dynamics of different ratios over time for different maturity ranging from 30 to 365 days (h=30/91/182/365)
h=30: The average annualised gain to BUY CALL is 0.14% for 2001 - 2020. The average annualised gain to BUY PUT is -5.83% for 2001 - 2020.
h=91: The average annualised gain to BUY CALL is 1.8% for 2001 - 2020. The average annualised gain to BUY PUT is -4.1% for 2001 - 2020.
h=182: The average annualised gain to BUY CALL is 2.81% for 2001 - 2020. The average annualised gain to BUY PUT is -3.55% for 2001 - 2020.
h=365: The average annualised gain to BUY CALL is 4.23% for 2001 - 2020. The average annualised gain to BUY PUT is -3.1% for 2001 - 2020.
Image Set 2 calculates the proportion of in-the-money (profitable) and out-of-money(unprofitable) for BUYING derivates by type (call/put option) averaged across a calendar year:
Image Set 3 calculates the profitability of buying in-the-money (profitable) and out-of-money(unprofitable) for BUYING derivates by type (call/put option) averaged across a calendar year:
h=30: The average annualised gain to SELL CALL is -0.14% for 2001 - 2020. The average annualised gain to SELL PUT is 6.16% for 2001 - 2020.
h=91: The average annualised gain to SELL CALL is -1.77% for 2001 - 2020. The average annualised gain to SELL PUT is 4.23% for 2001 - 2020.
h=182: The average annualised gain to SELL CALL is -2.77% for 2001 - 2020. The average annualised gain to SELL PUT is 3.62% for 2001 - 2020.
h=365: The average annualised gain to SELL CALL is -4.23% for 2001 - 2020. The average annualised gain to SELL PUT is 3.1% for 2001 - 2020.
Image Set 4 calculates the proportion of in-the-money (profitable) and out-of-money(unprofitable) for SELLING derivates by type (call/put option) averaged across a calendar year:
Image Set 5 calculates the profitability of buying in-the-money (profitable) and out-of-money(unprofitable) for SELLING derivates by type (call/put option) averaged across a calendar year:
