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The Optimal Total Costs for Writing a Straddle

Author

Listed:
  • Hsinan Hsu

    (Department of Finance, Feng Chia University, Taiwan)

  • Emily Ho

    (Department of Finance and Banking, National Pingtung Institute of Commerce, Taiwan)

Abstract

The straddle is one of the most popular combinations of option strategies suitable in highly volatile markets. Minimization of transaction costs is one of the three objectives for volatility trade design. The purpose of this article is to investigate the optimal total costs for writing a straddle using Taiwan stock index options (TXO) data. Assuming that TXOs are priced based on the Black-Scholes model, the optimal strike price that minimizes the total costs of writing a straddle, regardless of maturities, theoretically occurs at the point where options are about at-the-money. Empirical results are consistent with theory, implying that the pricing of TXOs is consistent with the Black-Scholes model.

Suggested Citation

  • Hsinan Hsu & Emily Ho, 2012. "The Optimal Total Costs for Writing a Straddle," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 11(1), pages 13-24, June.
    • Handle: RePEc:ijb:journl:v:11:y:2012:i:1:p:13-24
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    References listed on IDEAS

    as
    1. George F. Tannous & Clifton Lee‐Sing, 2008. "Expected Time Value Decay of Options: Implications for Put‐Rolling Strategies," The Financial Review, Eastern Finance Association, vol. 43(2), pages 191-218, May.
    2. Smith, Clifford Jr., 1976. "Option pricing : A review," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 3-51.
    3. Santa-Clara, Pedro & Saretto, Alessio, 2009. "Option strategies: Good deals and margin calls," Journal of Financial Markets, Elsevier, vol. 12(3), pages 391-417, August.
    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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