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

Volume 6, Issue 2 & 3 125
Conclusion
This study demonstrates that a bull call spread is hardly profitable
for ordinary investors. Given the sizable bid-ask spread of calls, it is hard to
make any profits from this spread position. Compared to the bid-ask spread of
a stock, the bid-ask spread of an option is enormous, which makes a bull call
spread unprofitable. The results in the paper confirm that options trading is
truly risky. When someone claims that options trading is easy to use to make
money, it is definitely important to consider this claim with suspicion. Also, it
will be unethical if those companies, particularly software sellers, do not
accurately reveal the whole picture of options strategies to potential buyers.
This paper does not claim that it is impossible to use a bull call
spread to make money. Instead it asserts that it is extremely difficult for
ordinary, non-professional investors to take advantage of it. Professional
options traders may skillfully implement the strategy by picking correct stock
options, timing the market, taking follow-up actions, or using program trading.
Those professional investors may even take advantage of lower bid-ask
spreads, compared to non-professional investors.
Given the results, however, it would be safe to conclude that options
trading is too risky for ordinary investors to adopt for their investment. The
high level of risk involved with options trading is not worth taking, considering
the risk-return tradeoff. The results suggest that even a relatively easy-toimplement
strategy, such as a bull call spread, is hardly profitable. One
implication for financial planners is that they have to explain the enormous
risk involved with such options strategies when their clients express their
interest. In fact, it would not be a bad idea at all to discourage their clients to
put their hard-earned money into such barely-rewarding trading frameworks.
This paper clearly makes the point.
Endnotes
Research & Theory
1
The first listed option contracts were offered by the Chicago Board Options
Exchange in 1973 and were traded on common stock.
2
Even a simple covered call strategy using out-of-the-money calls is known to
bring significant benefits to investors in terms of risk and reward. It is
reported that covered call writing reduces the volatility of returns significantly,
but does not significantly lower returns. See Han and Dadlani (2006)
for covered call writing.
3
For a variety of follow-up actions, see McMillan (2002).