Selling options to beat the market: Further empirical evidence

• Published in: Research in international business and finance 2024-01, Vol.67, p.102119, Article 102119
• Main Authors: Balbás, Alejandro, Serna, Gregorio
• Format: Article
• Language: English
• Subjects: Buy and hold golden strategy; Derivative market; Downside risk measure; Market efficiency; Outperforming benchmarks
• ISSN: 0275-5319
• DOI: 10.1016/j.ribaf.2023.102119

Brownian-motion-linked pricing models predict the existence of derivatives whose value at risk in short positions is lower than their price. The derivative sale plus the price investment in riskless assets becomes self-financing with negative risk. Repeating over and over this strategy, the price remains zero, but the risk tends to minus infinity. This paper reports results of empirical studies about the performance of this strategy. The American SP-500 and the German DAX-30 are involved. In both cases the index is beaten by simple buy and hold strategies containing riskless assets and short options. This finding may be interesting to practitioners and theoretically relevant. Firstly, the market can be beaten in an orthodox way, since results of Financial Economics inspire the methodology. Secondly, the risk never tends to minus infinity in practice. Perhaps the theoretical behavior in tails of Brownian-motion-linked models should be revisited. [Display omitted] •A golden strategy is a self-financing portfolio with negative VaR or CVaR.•Brownian-motion-linked pricing models predict buy and hold golden strategies.•The DAX-30 and the SP-500 indices may be outperformed with golden strategies.•The way to outperform the indices is indicated by orthodox Finance theories.•Brownian-motion-linked models and market prices may reflect tail discrepancies.