P. Santa-Clara and A. Saretto: Option Strategies: Good Deals and Margin Calls

December 8, 2004

We investigate the risk and return of a wide variety of trading strategies involving options on the S&P 500. We consider naked and covered positions, straddles,strangles, and calendar spreads, with different maturities and levels of money ness.Overall, we find that strategies involving short positions in options generally compensate the investor with very high Sharpe ratios, which are statistically significant even after taking into account the non-normal distribution of returns.Furthermore, we find that the strategies’ returns are substantially higher than warranted by asset pricing models.