So here are some sample academic studies.
Who Profits From Trading Options?
51 Pages Posted: 16 Jun 2021
Jianfeng Hu
Singapore Management University - Lee Kong Chian School of Business
Antonia Kirilova
Singapore Management University - Lee Kong Chian School of Business
Seongkyu Gilbert Park
Willamette University
Doojin Ryu
Sungkyunkwan University
Date Written: June 15, 2021
Abstract
We use account-level transaction data to examine trading styles and profitability in a leading derivatives market. We find that retail investors in particular favor a consistent trading strategy: approximately 70% of retail investors predominantly hold simple one-sided positions in only one class of options, while institutional investors are more likely to use multiple strategies with a range of complexity. Accordingly, we use trading style complexity as an ex ante measure of trading skills to demonstrate its significant effect on investment performance. We find that retail investors using simple strategies are losing to the rest of the market. For both retail and institutional investors, volatility trading earns the highest return, and risk neutral strategies deliver the highest Sharpe ratio. We conclude that these style effects are persistent and cannot be explained by systematic risk exposure or known behavioral biases.
https://deliverypdf.ssrn.com/delive...14109121008080067116119020&EXT=pdf&INDEX=TRUE
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Investor sentiment and value and growth stock index options
Jerry Coakley
,
George Dotsis
,
Xiaoquan Liu
&
Jia Zhai
Pages 1211-1229 | Received 13 Mar 2012, Accepted 20 Feb 2013, Published online: 18 Apr 2013
Abstract
The paper examines the relationship between both individual and institutional investor sentiment measures and the risk-neutral skewness (RNS) of seven stock index options comprising either growth or value stocks. It provides novel evidence that growth index option prices are affected by sentiment measures. The regression results indicate a significantly positive relationship between sentiment measures and the RNS estimated from four growth index options and a negative relationship with two value index options. The results are economically significant since an associated long–short trading strategy yields high abnormal returns with a Sharpe ratio of up to 1.1 and zero exposure to systematic risk. These high abnormal returns provide evidence of a value premium type anomaly in the index options markets.
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Optimal Option Portfolio Strategies: Deepening the Puzzle of Index Option Mispricing José Afonso Faias and Pedro Santa-Clara* Abstract Traditional methods of asset allocation (such as mean–variance optimization) are not adequate for option portfolios because the distribution of returns is non-normal and the short sample of option returns available makes it difficult to estimate their distribution. We propose a method to optimize a portfolio of European options, held to maturity, with a myopic objective function that overcomes these limitations. In an out-of-sample exercise incorporating realistic transaction costs, the portfolio strategy delivers a Sharpe ratio of 0.82 with positive skewness. This performance is mostly obtained by exploiting mispricing between options and not by loading on jump or volatility risk premia.
https://www.cambridge.org/core/serv...the-puzzle-of-index-option-mispricing-div.pdf
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Commodity Option Implied Volatilities and the Expected Futures Returns Lin Gao ∗ November 12, 2017 Abstract The detrended implied volatility of commodity options (VOL) forecasts the cross section of the commodity futures returns significantly. A zero-cost strategy that is long in low VOL and short in high VOL commodities yields an annualized return of 12.66% and a Sharpe ratio of 0.69. Notably, the excess returns based on the volatility strategy emanate mainly from its forecasting power for the future spot component, different from the other commodity strategies examined so far in the literature which are all driven by roll returns. This strategy demonstrates low correlations (below 10%) with the other strategies such as momentum or basis and performs especially well in recessions. Our results are robust after controlling for illiquidity, other commodity pricing factors, and exposure to the aggregate commodity market volatility. The VOL measure is associated with hedging pressure on the futures and especially on the options market. News media also helps amplify the uncertainty impact. Variables related to investors’ lottery preferences and market frictions are able to explain part of the predictive relationship.
https://deliverypdf.ssrn.com/delive...96086094024082001068006100&EXT=pdf&INDEX=TRUE
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...and there are many more interesting academic studies within the options space. And they also show more profitable strategies too FYI.
