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ABSTRACT
The objective of this research is to study the performance of arbitrage and spread
trading strategies for TAIFEX option market based on theory and practice of TAIFEX
VIX index that is composed according to CBOE VIX index. The research findings are
as follows:
1. The characteristic of VIX of TAIFEX is similar to the VIX of CBOE, and the
former also can be called as “The Investor Fear Gauge of Taiwan.” The VIX offers
not only more information for Taiwanese traders but also judgments and directions of
market trend for the investment institutes which trade and hedge in the spot market.
2. The dimension of arbitrage strategy is shrinking : In 2005, because the local and
foreign corporations participated avidly in the TAIFEX option market, the trading
volume grew very quickly. In 2004, there were 45 chances for synthetic futures position
to gain more than 20 points by using arbitrage. However, in 2005, there were only 12
chances left. The chances decreased obviously. It also means that TAIFEX option
market has been growing more maturely and more efficiently than before.
3. If we have to consider the trading cost, the strategy of bull spread trading for call
option will not obtain excess returns in practice. Although the chances of bear spread
trading strategy for put option are not so many, it is profitable and its performance is
really desirable. In other words, when we trade with the strategy of vertical spread
trading of TAIFEX option in bear market, the VIX index can reflect the effect of
“investor fear” and thus we can have stable and profitable performance. On the other
hand, the performance is not so good when the market is in the up or flat trend.
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