Is trading in the shortest-term index options profitable?

Abstract

The aim of this study is to examine the return rates of the TAIEX options with at most 8 calendar days to maturity using a buy-and-hold strategy. Although our results generally reveal that the index option returns are significantly negative, we also find that whilst the return rates of monthly-expiring calls are inferior to those of weekly-expiring calls, the return rates of monthly puts tend to be less negative than those of weekly puts. Furthermore, as monthly (weekly) options approach their maturity dates, the underlying index returns are found to be negative (positive). Risk-neutral volatility and skewness are used to measure the respective fear and pessimism levels among investors towards the stock market, and indeed, we find that as the expiration date approaches, there is a discernible increase in both the fear and pessimism of investors with regard to monthly options, as compared to a reduction for weekly options.