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

Volume 6, Issue 2 & 3 123
Hypothesis Testing:
(1) Average Returns Wilcoxon signed rank test = 4.62 (p-value = 0.00)
are equal. van der Waerden test = -4.34 (p-value = 0.00)
(2) Standard Deviations Wilcoxon signed rank test = 4.62 (p-value = 0.00)
are equal. van der Waerden test = 4.34 (p-value = 0.00)
(3) Sharpe Ratios Wilcoxon signed rank test = 4.62 (p-value = 0.00)
are equal. van der Waerden test = -4.34 (p-value = 0.00)
As a robustness check, we implemented a bull call spread slightly
differently. Instead of trading calls with three months to expiration, calls were
traded with just one month to expiration. It should be noted that, compared to
three-month calls, one-month calls have less time value, and the time value of
money decays faster, because time value of an option decays fastest during
the last month of its life. 8 Although not reported here, the results are qualitatively
the same. 9 For every single stock, the average return on the call spread
was less than that on the stock, and the standard deviation on the call spread
was higher than that on the stock.
As another robustness check, an out-of-sample test was done using
the data from the more recent period, covering 2004 – 2006. Table 5 presents
the performance results for the bull call spread and the outright stock investment
for the period of January 2004 – December 2006. The results show that
the bull call spread worked for investors only for three stocks: AT&T, Boeing,
and Exxon Mobil. In all the other cases, the bull call spread produced lower
average returns and higher standard deviations. Even in the case of those
three stocks, the standard deviations were substantially higher for the bull call
spread than for the stock. It is clear from the results that the bull call spread
failed to generate better results than stocks even in recent years despite the
fact that the bid-ask spread recently declined.
Research & Theory