Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/258279 
Year of Publication: 
2021
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 9 [Issue:] 11 [Article No.:] 196 [Publisher:] MDPI [Place:] Basel [Year:] 2021 [Pages:] 1-19
Publisher: 
MDPI, Basel
Abstract: 
It is generally said that out-of-the-money call options are expensive and one can ask the question from which moneyness level this is the case. Expensive actually means that the price one pays for the option is more than the discounted average payoff one receives. If so, the option bears a negative risk premium. The objective of this paper is to investigate the zero-risk premium moneyness level of a European call option, i.e., the strike where expectations on the option's payoff in both the P- and Q-world are equal. To fully exploit the insights of the option market we deploy the Tilted Bilateral Gamma pricing model to jointly estimate the physical and pricing measure from option prices. We illustrate the proposed pricing strategy on the option surface of stock indices, assessing the stability and position of the zero-risk premium strike of a European call option. With small fluctuations around a slightly in-the-money level, on average, the zero-risk premium strike appears to follow a rather stable pattern over time.
Subjects: 
pricing density
physical density
bilateral gamma
tilted bilateral gamma
call option
risk premium
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article
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