Abstract
The aim of this study is to examine the return rates of the TAIEX options with at most 8 calendar days to maturity using a buy-and-hold strategy. Although our results generally reveal that the index option returns are significantly negative, we also find that whilst the return rates of monthly-expiring calls are inferior to those of weekly-expiring calls, the return rates of monthly puts tend to be less negative than those of weekly puts. Furthermore, as monthly (weekly) options approach their maturity dates, the underlying index returns are found to be negative (positive). Risk-neutral volatility and skewness are used to measure the respective fear and pessimism levels among investors towards the stock market, and indeed, we find that as the expiration date approaches, there is a discernible increase in both the fear and pessimism of investors with regard to monthly options, as compared to a reduction for weekly options.
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Notes
Although weekly S&P 500 index options have had longer shelf lives out to almost 5 weeks, Chatrath et al. (2015) employed in a majority of tests the data spanning the interval January 2011 through May 2012, when weekly options had a shelf life of just 1 week.
In the discussion herein, the gross ROR rather than the rate of excess return is employed.
Andersen et al. (2017) suggest weekly options can provide precise information for the tails of the risk-neutral distribution.
The TAIEX is a value-weighted index which includes almost all firms listed on the Taiwan Stock Exchange (TWSE). At the end of 2014, the number of firms listed on the TWSE stood at 854.
A single point is equal to NTD50. On 23 March 2017, 1 USD can be approximately converted 30 NTD.
It is worthwhile to explain why huge daily negative returns result in large positive holding period returns in Tables 3 and 4. For instance, suppose that the holding-period returns are − 100, − 100, − 100 and 350%, and that their holding periods are all 3 days. According to the formula for daily rate of return presented above, the daily return rates are − 100, − 100, − 100 and 65%, respectively. Consequently, the average holding-period return is 12.5%, while the average daily return is − 59%.
When the TAIEX return rate during the option holding periods was converted into the daily return rate, the sign of the average daily return rate remained unchanged; however, there were reductions in the absolute values. Given that the index was at 8000 points, the average TAIEX daily fluctuations corresponding to the respective monthly and weekly option holding periods were approximately − 3 points and 3 points.
The data were obtained from the Central Bank of Taiwan website.
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Pan, GG., Shiu, YM. & Wu, TC. Is trading in the shortest-term index options profitable?. Rev Deriv Res 22, 169–201 (2019). https://doi.org/10.1007/s11147-018-9147-9
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DOI: https://doi.org/10.1007/s11147-018-9147-9