Investment Performance of Derivative Based Investment Strategies: Empirical Evidence
Main Article Content
Abstract
Empirical literature on finance indicates numerous investment strategies based on fundamental factors such as price-earnings ratio, book to
market ratio, size effect, value premium etc. to magnify the returns of investor in investment jargon. In the present paper, an attempt has been
made to examine the profitability associated with derivatives based investment strategies i.e. Long Future (Naked), Covered Call, Long
Straddle, Short Straddle in Indian capital market during the period of June 2000 to December 2010. The empirical results exhibited that
average monthly returns of all the four investment strategies studied for the whole study period were noted higher than the average riskless
return and benchmark index. The long straddle investment strategy scored highest average monthly return (18.88 percent) among all the
derivative investment strategies and long future (naked) investment strategy delivered lowest average monthly performance (4.63 percent) in
this regard. On the other hand, the present paper reveals none of the strategies generated lower variability of returns than the market portfolio
i.e. CNX Nifty-50 during the entire study period. The information inputs depict the long straddle investment strategy as highest risky (92.87
percent) investment strategy among all the derivative investment strategies and short straddle investment strategy delivered lowest
variability of monthly returns (10.54 percent) in this regard. The performance outcomes in terms of risk adjusted performance i.e. Sharpe
ratio reveals that the majority of investment strategies (3 out of 4) have outperformed the benchmark market proxy. The average Sharpe ratio
of short straddle investment strategy (1.63) was observed highest among all the investment strategies. On the other hand, long straddle
emerged as looser investment strategy (0.09) during the whole study period. Thus, the present paper documents evidences of superior
investment performance that could be constructed better than that of the passive benchmark portfolio. On the whole, the study indicates the
ability of the derivative based investment managers to meet the expectations of the investors.
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