Optimal option portfolio strategies
: risk or mispricing?

  • Lourenço Neto Branquinho da Costa Alves (Student)

Student thesis: Master's Thesis

Abstract

Options are known for having return distributions that depart from normality andlacking depth of sample data. These characteristics are the reason why conventionalmethods of portfolio optimization become obsolete for these securities. Therefore, I analyzethe original Optimal Option Portfolio Strategies (OOPS) in Faias & Santa-Clara(2017), proven to tackle option allocation problems properly, in three different frequencies:Monthly, weekly and weekly decomposed. All the strategies provided attractive results incomparison to their corresponding benchmarks, with Sharpe ratios and certainty equivalentsranging between 0.57 and 2.29, and 2.60% and 52.01%, respectively. I find that thesestrategies (with the exception of the weekly decomposed OOPS) tend to fuel their returnsnot only on mispricing, but also marginally on jump risk and volatility risk premia, whichcontradicts past literature.
Date of Award27 Jan 2021
Original languageEnglish
Awarding Institution
  • Universidade Católica Portuguesa
SupervisorJosé Faias (Supervisor)

Keywords

  • Options
  • Portfolio optimization
  • Optimal Option Portfolio Strategies (OOPS)
  • Sharpe ratios
  • Certainty equivalents
  • Mispricing
  • Jump risk and volatility risk premia

Designation

  • Mestrado em Gestão e Administração de Empresas

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