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Option strategies: Good deals and margin calls

  • Santa-Clara, Pedro
  • Saretto, Alessio

We provide evidence that trading frictions have an economically important impact on the execution and the profitability of option strategies that involve writing out-of-the-money put options. Margin requirements, in particular, limit the notional amount of capital that can be invested in the strategies and force investors to close down positions and realize losses. The economic effect of frictions is stronger when the investor seeks to write options more aggressively. Although margins are effective in reducing counterparty default risk, they also impose a friction that limits investors from supplying liquidity to the option market.

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Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 12 (2009)
Issue (Month): 3 (August)
Pages: 391-417

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Handle: RePEc:eee:finmar:v:12:y:2009:i:3:p:391-417
Contact details of provider: Web page: http://www.elsevier.com/locate/finmar

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