||This paper view implied volatility spread of options as a leading indicator, when this indicator shows one option deviates from another, it means that one option undervalue or overvalue relative to another. Then we buy low and sell high in the market. We find out that the portfolio still beat the market after consider the trading cost. We also find out that compared to other period, there has higher return when we build the trading position at about 11-15 remaining day of trading.|
This paper also discusses the implied volatility of call options and put options respectively. Because one of characteristic of implied volatility is mean reverting, it means that one option undervalue or overvalue if the implied volatility of call or put is much deviates from mean value. We use the stray value as the second indicator, and we buy low and sell high in the market. We find out that after considering the transaction cost, there are not significantly positive returns in call options except for which with deep-out-of-the-money. In contrast to call option, there still have significantly positive return in put options with no matter out-of-the-money or in-the-money. In addition, if we don’t take hedge into account when we buy or sell put option, the portfolios could get higher returns.
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