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Do Option Strategy Traders Have a Disadvantage? Evidence from the Australian Options Market

Authors


  • This research was funded by the Sydney Futures Exchange under Corporations Regulation 7.5.2.2. The authors would like to thank workshop participants of the Business Development Group at the Australian Securities Exchange.

Abstract

This study measures the magnitude of execution costs of outright options and options which constitute strategies (“strategy-linked options”), and examines if any differences in execution costs between these two groups is attributable to differences in market making costs on the Australian Options Market. Results reveal that execution costs for tailor-made strategy-linked options are greater than outright options. Also, this study provides evidence that the disadvantage of tailor-made strategy-linked options over outright options is driven by market makers' hedging costs. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:838–852, 2014

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