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dc.contributor.authorChaput, J Scotten_NZ
dc.contributor.authorEderington, Louis Hen_NZ
dc.date.available2011-04-07T03:19:01Z
dc.date.copyright2002-05-03en_NZ
dc.identifier.citationChaput, J. S., & Ederington, L. H. (2002, May 3). Option spread and combination trading. University of Otago Department of Finance Seminar Series.en
dc.identifier.urihttp://hdl.handle.net/10523/1530
dc.description.abstractDocumenting spread and combination trading in a major options market for the first time, we find that spreads and combinations collectively account for over 55% of large trades (trades of 100 contracts or more) in the Eurodollar options market and almost 75% of the trading volume due to large trades. In terms of total volume, the four most heavily traded combinations are (in order): straddles, ratio spreads, vertical spreads, and strangles. These four represent about two thirds of all combination trades. On the other hand, condors, horizontal spreads, guts, iron flys , box spreads, guts, covered calls or puts, and synthetics are very rarely traded while trading is light in collars, diagonal spreads, butterflies, straddle spreads, seagulls, doubles, and delta-neutral combinations. Significant differences in size, cost, and time-to-expirations are found among the various combination types. Our results confirm that traders use spreads and combinations to construct portfolios which are highly sensitive to some risk factors and much less sensitive to other risk factors. The most popular combination designs are those yielding portfolios which are quite sensitive to volatility and less sensitive to directional changes in the underlying asset value – though they are often not completely delta neutral. Among these, combinations which are short volatility significantly out-number those which were long. Among the minority of combinations which are highly sensitive to the underlying asset price, those with positive deltas significantly outnumber those with negative deltas indicating that traders are using this market to bet on or hedge against an increase in the LIBOR rate. We find evidence that effective bid/ask spreads are larger on orders exceeding 500 contracts or more than on orders of between 100 and 500 contracts and evidence that effective bid/ask spreads are larger on combinations which short volatility.en_NZ
dc.format.mimetypeapplication/pdf
dc.relation.ispartofUniversity of Otago Department of Finance Seminar Seriesen_NZ
dc.relation.urihttp://www.business.otago.ac.nz/finc/research/seminars_02.htmlen_NZ
dc.subjectoptions marketen_NZ
dc.subjectspread and combination tradingen_NZ
dc.subjectportfoliosen_NZ
dc.subjectbid/ask spreadsen_NZ
dc.subjectVolatilityen_NZ
dc.subject.lcshHF Commerceen_NZ
dc.subject.lcshHF5601 Accountingen_NZ
dc.subject.lcshHG Financeen_NZ
dc.titleOption spread and combination tradingen_NZ
dc.typeConference or Workshop Item (Seminar, Speech or Other Presentation)en_NZ
dc.description.versionUnpublisheden_NZ
otago.bitstream.pages47en_NZ
otago.date.accession2007-04-12en_NZ
otago.schoolFinanceen_NZ
otago.openaccessOpen
otago.place.publicationDunedin, New Zealanden_NZ
dc.identifier.eprints614en_NZ
dc.description.refereedNon Peer Revieweden_NZ
otago.school.eprintsFinance & Quantitative Analysisen_NZ
dc.description.referencesBillingsley, R. S. and D. M. Chance. 1987. Options market efficiency and the box spread strategy. Financial Review 20, 287-301. Black, F., 1976, The pricing of commodity contracts, Journal of Financial Economics 3, (March), 176-179. Hemler, M.., and T. W. Miller Jr. 1997. Box spread arbitrage profits following the 1987 market crash, Journal of Financial and Quantitative Analysis 32 (1), 71-90. Hull, J., 2000, Options, Futures, and Other Derivative Securities, 4th Edition, Englewood Cliffs, Prentice Hall. Kolb, R. W., 2000, Futures, Options, and Swaps, 3rd edition, Cambridge, Blackwell. Melamed, L., 1996, Escape to the Futures, New York, John Wiley and sons. Natenberg, S., 1994, Option Volatility and Pricing: Advanced Trading Strategies and Techniques, Second Edition, Chicago, Probus. Ronn, A. G., and E. I. Ronn. 1997. The box spread arbitrage: theory, tests, and investment strategies, Review of Financial Studies 2, 91-108. Stoll, H.R., and R. E. Whaley. 1993. Futures and Options: Theory and Applications, Cincinnati: South-Western Publishing..en_NZ
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