International Journal of Business and Economics Volume 11, No. 1 June, 2012

The Optimal Total Costs for Writing a Straddle

Hsinan Hsu

Department of Finance, Feng Chia University, Taiwan

Emily Ho

Department of Finance and Banking, National Pingtung Institute of Commerce, Taiwan

Abstract

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.

Keywords：writing a straddle, total costs, optimal strike price, Black-Scholes model.

JEL Classifications：C15, G10.

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