Market Research
Technical Analysis
The combination of strategic trading complexities along with a wider parameter range is likely to generate profitable strategies, particularly over the last four days of the sampled data set ending in January 28. The tested sample, produce a rate of compounded percentage of return from 274% to 572% considering that the market only have a standard yield of 90%. This encompasses a trading system that relies on the encompassing rules in which the long moving average appears to be higher than the 31 days based on the sample. The test determines that the long and short positions strongly coincides with the existing market phase, given that its extent is not achievable by luck. Using debt as leverage can potentially increase strategic rate of returns. Moreover, considering the buy-and-hold together with the similar leverage appears to be not helping in increasing the return. It is an indication that the performance of the trading strategies is not aligned with the forecasting abilities. On the other hand, the investor-borrowing rate has a higher probability of influencing the use of debt. However, traded option that were exchanged are possible to reach loss of value through time, thus, constitutes mixed evidence. Furthermore, investment that is part of a limited capital availability in options normally results to higher series of volatilities. Lastly, the test also shows that the strategies were particularly worthwhile in the concept of that considers the skewness risk.
The results shown in the separate spreadsheet leaves us some speculative notion to explore. Considering that the traded options exchange is more in in favor with the strategic nature that leads to the variation of conclusions. It appears to make more sense if long-term options were used instead of the conventional approach, which gives a much lower theta. The limitations perceived in the results were caused by the statistical findings, which are based from the sampled data. Even though there were anomalies in the calculated returns, they are still economically significant, rather than statistically relevant. It is apparent that regular student tests anticipates required returns, which are at least showing that it is three times higher as compared to buy-and-hold to be able to defeat the anticipation of equal means. It is quite difficult to achieve particularly when the solution design was based on new tests and chain, which supposed to be more flexible and powerful. Developments in these tests are likely candidates for future research.
There are few preliminary studies conducted that focuses on the exchange traded option approach considering that it does not include returns. Simple returns is much easier to use since a log-transformation provides a minus infinity return specifically for stock options that are perceived as worthless. The first determining step is to compute the closing prices with the previous closing price together with the last sale prices. The closing price spread should also be included in options returns to be able to gain realistic proxy. Consequently, the option return appears to be different when compared on a day-to-day basis regardless if there are newly initiated position or not.
The initiation of a new position, which lasts at least two days corresponds to the option that were bought at the bid price at time t and the with closing price were also used at the same time t+1 as there is no trade. The next equation below is an example of approach that enables the computation of returns based from the last day of a position, the price used by the option was sold. Returning positions, which are kept only for a day, are computed with the below equation. Generally, the same method is applied on trading signals that remain constant, but the preferred option does trading signal does. Apparently, a continuous options time series needs to be extract from the entire options database. In connection with the studies geared towards the analysis of options returns, the following method is being proposed: Every single trading day should put a single call option when selected in relation to the following criterions: Firstly, is the determination of options that has maturity period from 25 to 90 days together with moneyness level from -5% to +5%.
where PC,t and X are represents the price of the closing option at time t and its strike. The calculation provides assurance that an out-of-the money option encompasses varying level of positive and negative moneyness. Then, the options with the highest daily open interest are chosen. Using liquidity measures in any given selection process should have mispricing limitations, which is possibly to occur when trading is out for a while. Lastly, this option will be kept until such time it matures to 10 days.
Descriptive statistics in options returns for different groups of portfolio formed in relation to their moneyness and maturity. Closing price is used to calculate daily returns. The last line of each panel in the below tables contain the mean option beta obtained based from Black and Scholes assumptions:
where S is the represents the current price, C represents the call option price (according to the Black and Scholes formula), X represents strike, r represents risk free rate, t represents maturity period as a fraction of a day, βs represents underlying beta and σ2 represents volatility with an estimation implied by the volatility index.
Call option returns encompasses shared-similarities with results from Young and Zous concept that investigates option returns according to the CAPM framework. First of all, deep-in-the-money call options to at-the-money call options results to increase in returns caused by higher leverage. However, out-of-the-money options returns usually come out negative particularly when the maturity decreases. It is an apparent contradiction to the positive expected call option returns hypothesis and its probability can be speculated as due to big losses experienced in temporal value, that are not normally compensated intrinsic value increased, regardless if there is an upward trend. Apparently, it is more significant for options that have short maturity periods. A massive 500% annualized return is represents 2% mean daily return for at-the-money call options with a medium maturity which appears to be much higher than the forecasted its risk measured by its beta. Nonetheless, less massive skewness and variance together with a mean return of zero is an indication that this mean return strongly depends on less positive extreme observations resulting to maximum daily return to reach 473%.
Moreover, it is typically known that for out-of-the-money call options, the findings provides a confirmation that return of out-of-the-money options are particularly lower as compared to their immediate in-the money counterparts. The variety of issues probably possesses negative influence on the trading strategies performance of the traded options. The method of options selection strives in minimizing negative influence by means of selecting at-the-money options at a stock price ranging between 6% and 7%. The everyday changes in options encompasses a very high trading costs, investors tend to keep the same options provided that there are no other occurring signals and when maturity is higher than two weeks past.
Table 6 CAPM
