Replication of Straddle Position and Evaluation of Its Performancein the Taiwan Stock Market

Abstract

The purposes of this paper has twofold. One is to demonstate the replication of the Straddle position and the other is to examine its performance in the Taiwan stock market. We use the Taiwan Stock Exchange Index (TAIEX) and interest-rate of savings account to replicate Straddle position and compare its performance with dynamic portfolio insurance strategy and buy-and-hold strategy. The results indicate that (1) for synthetic Straddle strategy, the terminal values of assets are significantly reduced when transations costs are considered, but the influence between adjustment rules is insignificant; (2) Returns on synthetic Straddle strategy are relatively higher than those on synthetic puts or buy-and-hold strategies; (3) In bull markets, synthetic Straddle strategy performs best. In bear market, although synthetic put does provide insurance function, synthetic Straddle strategy can earn more positive returns. Finally, in correction markets, synthetic Straddle strategy performs worst; (4) The impact of stock price volatities on the performance of synthetic Straddle strategy is very significant; (5) Synthetic Straddle strategy obviously could not provide a stable return. inflow; And (6) the selection of investment strategies depends on the risk tolerance of investors. It seems that conservative investors will select portfolio insurance strategy, while only risk lovers can endure the Straddle strategy which is characterized by high risk and high return.