Options portfolio selection with position limits
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.
Fields of Study & Subjects
Stochastic processes and financial applications
Capital Investment and Risk Analysis
Publication details
- Journal / source
- Journal of Empirical Finance
- Publisher
- Elsevier BV
- Volume
- 89
- Pages
- 101770–101770
- Publication date
- 2 September 2026
- Language
- EN