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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;
Black-Scholes
model |
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| JEL
classification:
C15; G10 |
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