Journal of Economics and Management Volume 18, No. 2 September, 2022

A Study on Improving the Profitability of Option Spread Strategies by Using Implied Volatility – Evidences from Weekly TAIEX Options

Ming-Guan Huang

Department of Finance and Banking, Shih Chien University, Taipei, Taiwan.

Yi-Shen Huang

Department of Finance and Banking, Shih Chien University, Taipei, Taiwan.

Abstract

This study develops an improved bull spread and bear spread strategy, which is created by respectively buying and selling a call option (put option) at a relatively undervalued price and a relatively overvalued price based respectively on the minimal and maximal implied volatility. The made bull spread and bear spread is then held to maturity. Besides, this study endeavors to boost up the settlement profit through using the trading filter depended on volatility difference and expected profit. The weekly TAIEX options are taken as the empirical object to verify the profitability for this improved spread strategy. The empirical results show that the proposed spread strategy associated with implied volatility can earn a sizable settlement profit. Overall, the settlement profit obtained from put spread is relatively better than that of the call spread. Moreover, the profitability is significantly advanced when cooperating with the trading filter, especially when using the expected profit screening criteria.

Keywords：Implied volatility, Option spread strategy, Bull spread, Bear spread, TAIEX options

JEL Classifications：G11.

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