3433-vol. 6 issue 2-3.pmd - iarfc

Volume 6, Issue 2 & 3 117
defined above, would have cost a fortune to investors. In fact, Table 2
manifests that the bull call spread failed not just for Alcoa but also for every
single stock in the sample. During the sample period, the outright stock
investment would have generated healthy returns, but the call spread would
have made a devastating impact on investors. Several statistical test results
are reported at the bottom of the table. Since the distribution of returns and
standard deviations do not follow a normal distribution, parametric tests were
not used. 7 Instead non-parametric tests were used, which are less subject to
distribution assumptions than parametric tests (Conover (1980)). Throughout
this paper non-parametric test results are presented. Both the Wilcoxon
signed rank test and van der Waerden test show that the average returns are
significantly lower but the average standard deviations are significantly
higher for the call spread. The difference is significant at the 1% level for both
average returns and standard deviations. Naturally, the Sharpe ratios under
the call spread are significantly lower than those under the outright stock
investment at the 1% level. It is clear that the bull call spread would have
been disastrous to investors.
Research & Theory