Enhanced indexation using both equity assets and index options
Researchers show that embedding rule-based index option strategies as long-lived assets in enhanced indexation lifts returns and cuts drawdowns. Strategies enter a linear program using scaled second-order stochastic dominance. On an S&P 500 set from 2017 to 2025, with 12 trades priced by Black Scholes and 21 day rebalancing, equities plus options beat equities. Final value 3.61 vs 2.89. CAGR 18.5% vs 15.1%. Sharpe 0.74 vs 0.63. Drawdown 21.4% vs 30%. Caveats include costs, proxies, overfitting.
What it examines
This paper introduces 'option strategies'—rule-based trading of index options treated as artificial assets—for enhanced indexation. Using linear programming with scaled second‑order stochastic dominance, the authors combine S&P 500 stocks or SPY with option strategies. Backtests on survivorship-bias-corrected 2017--2025 data evaluate buy/sell/roll rules and rebalancing.
What it concludes
Option strategies improved out‑of‑sample returns, Sharpe/Sortino, and drawdowns versus equity-only or SPY alone. Uses include index enhancement, downside protection, semi‑passive ETF overlays, and broader portfolio optimization. Limits: no trading costs, BS pricing, overfitting risk. Future work: cost/liquidity modeling, richer pricing, American options, exposure limits, and targeted protective/return‑seeking designs.
Evidence objects
Treating index option strategies as long-lived assets boosts enhanced indexation: equities+options beat equities-only (final value 3.61 vs 2.89; CAGR 18.5% vs 15.1%; Sharpe 0.74 vs 0.63; drawdown 21.4% vs 30%).
key_findings bullet 1 · key_findings · validation V0
Option strategies become portfolio blocks in linear programming with stochastic dominance, bridging options and indexation, generalizable; S&P 500 dataset (2017--2025), 12 strategies including momentum puts, reversal calls, and low-vol straddles.
key_findings bullet 2 · key_findings · validation V0
On SPY, options improved Sortino and reduced tail risk despite higher volatility. Priced via Black--Scholes (VIX, IRX), rebalanced 21 days on 200 returns; omissions: costs, exposure caps; overfitting risk remains.
key_findings bullet 3 · key_findings · validation V0
Treating predefined index option rules as an artificial asset is novel, integrating options into enhanced indexation via $LP$ under $SSD$. This application-centric framing overcomes option lifecycle issues, releases a survivorship-bias-adjusted $S&P~500$ dataset (2017--2025), and reports out-of-sample gains, making the approach practically compelling despite relying on established optimization machinery and theory.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
Abstract: In this paper we consider how we can include index options in enhanced indexation. We present the concept of an \enquote{option strategy} which enables us to treat options as an artificial asset. An option strategy for a known set of options is a specified set of rules which detail how these options are to be traded (i.e.~bought, rolled over, sold) depending upon market conditions. We consider o… ▽ More In this paper we consider how we can include index options in enhanced indexation. We present the concept of an \enquote{option strategy} which enables us to treat options as an artificial asset. An option strategy for a known set of options is a specified set of rules which detail how these options are to be traded (i.e.~bought, rolled over, sold) depending upon market conditions. We consider option strategies in the context of enhanced indexation, but we discuss how they have much wider applicability in terms of portfolio optimisation. We use an enhanced indexation approach based on second-order stochastic dominance. We consider index options for the S\&P~500, using a dataset of daily stock prices over the period 2017-2025 that has been manually adjusted to account for survivorship bias. This dataset is made publicly available for use by future researchers. Our computational results indicate that introducing option strategies in an enhanced indexation setting offers clear benefits in terms of improved out-of-sample performance. This applies whether we use equities or an exchange-traded fund as part of the enhanced indexation portfolio. △ Less
Source row: 700 · abstract type: unknown