Enhancing portfolio efficiency via dynamic European option allocation : A study on the risk-adjusted performance of systematic Covered Call and Protective Put strategies on the S&P500 Index

Sammanfattning

This thesis explores the intersection of financial mathematics and industrial economics, focusing on the enhancement of portfolio efficiency through systematic use of financial derivatives. Building on existing literature showing that many corporate entities maintain conservative cash positions, this thesis combines Covered Call and Protective Put strategies within a unified optimization framework to assess whether systematic option strategies can improve risk-adjusted returns. While prior work evaluates Covered Call and Protective Put strategies individually, their dynamic, combined optimization within a rules-based framework remains less explored. The methodology involves developing a quantitative framework that dynamically allocates capital between three components: a passive S&P 500 index holding, a systematic Covered Call strategy, and a systematic Protective Put strategy. Synthetic options are priced using the Black-Scholes-Merton model with implied volatility inputs derived from the VIX1Y index. Portfolio weights are rebalanced quarterly using a rolling Mean-Variance Optimization approach via Quadratic Programming to minimize portfolio variance while meeting a target return constraint. The framework was evaluated through a ten-year backtest spanning from 2014 to 2024 to assess risk-adjusted performance against a passive buy-and-hold benchmark. The findings demonstrate that the dynamically optimized portfolio consistently improves risk-adjusted performance, with nearly all configurations achieving higher Sharpe ratios than the S&P 500 benchmark. Sensitivity analysis reveals a critical trade-off between model responsiveness and estimation stability; specifically, a 6 quarter lookback window was found to be the most robust window for realistic risk-premium targets. Furthermore, the study identifies a saturation point where extreme return targets lead to concentrated allocations in the highest-yielding asset, effectively neutralizing diversification benefits. These results suggest that systematic option strategies can serve as a replicable tool for corporate treasuries and institutional investors to manage idle capital more efficiently while maintaining control over downside risk.