Journal of Empirical Finance· 2026Q1
Options portfolio selection with position limits
- 1citations
- Q1SCImago
- 2026year
Short summary
Index-neutral options strategies using mean-variance optimization with position limits and transaction costs yielded Sharpe ratios between 1 and 2 for S&P 500 and Nasdaq 100, but less than 0.5 for the Dow Jones.
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Key points
- Index-neutral options strategies achieved Sharpe ratios of 1-2 for S&P 500/Nasdaq 100 and <0.5 for Dow Jones.
- Solvency constraints reduced Sharpe ratios by 33% (S&P 500/Nasdaq 100) and 67% (Dow Jones).
- All strategies suffered significant losses during the 2020 coronavirus shock.
- The analysis covered 1996-2020 using monthly options data with position limits and transaction costs.
AI-generated from the title and abstract; the full text is not read.
Abstract
This paper examines the performance from 1996 to 2020 of mean-variance efficient portfolios of monthly options with all available strikes on each of the S&P 500, Nasdaq 100, and Dow Jones indexes, using a constrained optimization approach that incorporates position limits, transaction costs, and volatility persistence. The Sharpe ratios of index-neutral strategies is between one and two for the S&P 500 and Nasdaq 100, but less than half for the Dow Jones. Constraining portfolios to be solvent on all past index' returns reduces Sharpe ratios by a third in the S&P 500 and Nasdaq 100 and by two thirds in the Dow Jones. All strategies suffer significant losses from the coronavirus shock of 2020, underscoring their vulnerability to rare events.
The authors' abstract, as published at the source. Journal of Empirical Finance, 2026 · DOI ↗
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Field: Finance
FinanceEconomics, Econometrics and Finance