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| Volume 11, No. 1, June 2012 |
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| The
Optimal Total Costs for Writing a Straddle |
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Hsinan Hsu |
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| Department of Finance, Feng Chia University,
Taiwan |
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Emily Ho |
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| Department of Finance and Banking, National
Pingtung Institute of Commerce, Taiwan |
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| Abstract |
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| The
straddle is one of the most popular combinations of
option strategies suitable in highly volatile markets.
Minimization of transaction costs is one of the three
objectives for volatility trade design. The purpose of
this article is to investigate the optimal total costs
for writing a straddle using Taiwan stock index options
(TXO) data. Assuming that TXOs are priced based on the
Black-Scholes model, the optimal strike price that
minimizes the total costs of writing a straddle,
regardless of maturities, theoretically occurs at the
point where options are about at-the-money. Empirical
results are consistent with theory, implying that the
pricing of TXOs is consistent with the Black-Scholes
model. |
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| Key words:
writing a straddle; total costs; optimal strike price;
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Black-Scholes model
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| JEL classification: C15; G10 |
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