THE RETURNS FROM CALL AND PUT OPTION PORTFOLIO INVESTMENT STRATEGIES ON THE JSE EXCHANGE
Date
2011-05-13
Authors
Mahanjana, Osborn Mzuvumile
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Abstract
Investors need to be informed about the return characteristics of various option strategies in order to benefit from additional investment opportunities provided by options. The purpose of this study is to examine, from a historical perspective, the return, and associated risk, of using fully covered call option and protective put option strategies with the underlying portfolio of selected shares from the JSE Securities Exchange, South Africa (JSE).
The objective of this study is to consider two option strategies - the covered call strategy and the protective put strategy. The former strategy involves writing a call option and buying the underlying stock, while the latter involves buying a put whilst holding underlying stock.
The study compares the performance of the two strategies in a global investment strategy which combines diversification and hedging to the performance of a stock portfolio without options.
The results from this study provide investment options and strategies across various levels of risk aversion while still maintaining a diversified portfolio.
The stocks chosen were the top 40 listed shares on the JSE, measured by market capitalisation, and hypothesis testing was used to illustrate the differences in performance between portfolios.
Results from this study showed that the combination of the underlying stocks with a fully covered call option strategy leads to returns similar to those of a portfolio of underlying stocks only, but the risk, as measured by standard deviation, is lower on a portfolio with fully covered call options when compared to a portfolio of underlying stocks only.
Combining the underlying portfolio with a protective put options strategy lowers the returns compared to those of a portfolio of the underlying stocks only.
Description
MBA - WBS
Keywords
Call and put options, Share portfolios, Johannesburg Securities Exchange