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The Performance of Trading Strategies Based on Deviations from Put-Call Parity of Stock Options

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  • Han-Ching Huang
  • Chien-Sheng Wen

Abstract

According to Cremers and Weinbaum [6], we compute the implied volatility spread by option put-call parity theory. Then, we build strategy based on implied volatility spread and compares it with OS, 52-week high, and contrarian investment strategies to explore whether the investment performance of the implied-volatility-spread based strategy is better than other strategies. Moreover, we combine the implied-volatility-spread based strategy with other strategies to form the two-dimensional investment strategy to explore whether the performance of two-dimensional implied-volatility-spread strategy is better than one-dimensional implied-volatility-spread strategy. The empirical results show that it needs more than one year of investment horizon to get positive abnormal return by implied-volatility-spread based strategy. Otherwise, it will only receive negative abnormal return when the investment horizon is less than one year. In addition, two-dimensional strategy improves bad performance of one-dimensional strategy. After combining the contrarian 52-week high and contrarian investment strategy with implied-volatility-spread strategy, we find that there is the best strategic effect when the holding period is 12 months. Nevertheless, the abnormal returns decrease after the holding period is 24 months. JEL classification numbers: G11, G12.

Suggested Citation

  • Han-Ching Huang & Chien-Sheng Wen, 2021. "The Performance of Trading Strategies Based on Deviations from Put-Call Parity of Stock Options," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 11(2), pages 1-3.
    • Handle: RePEc:spt:admaec:v:11:y:2021:i:2:f:11_2_3
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    References listed on IDEAS

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    More about this item

    Keywords

    Implied-volatility-spread; OS strategy; 52-week highs strategy; Trading volume strategy; Price momentum strategy; Option volume.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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