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Papers by Gary Trennepohl

Financial Management, 1981

Journal of Economics and Business, Feb 1, 1986

Journal of Business Finance & Accounting, Jun 1, 1981

Since the Chicago Board Options Exchange (CBOE) opened in 1973, research concerning listed option... more Since the Chicago Board Options Exchange (CBOE) opened in 1973, research concerning listed options has attempted to identify profitable option trading strategies. Merton, Scholes and Gladstein (1978) calculated risk and return from writing and buying six month at-the-money options from 1963 to 1975, based on simulated option premiums. Their results indicate the dominant risk-return position to be a portfolio invested 90% in prime commercial paper and 10% long options. Roenfeldt, Cooley and Gombola (1979) determined return distribution statistics for all CBOE options traded during the first 27 months of CBOE activity while Trennepohl and Dukes (1979) studied the profitability of timedependent option trading strategies during the 1973 to 1976 period. All studies show a reduction in risk by option writing strategies compared to an all equity position but divergent results are reported for returns from these strategies. Option market efficiency has been studied by Galai (1977), Finnerty (1978), and Black and Scholes (1972), while option pricing has been examined by Black and Scholes (1973), Smith (1976), Rolgalski (1978), and Gastineau (1975). No significant market inefficiencies have been identified. The purpose of this research is to assess strategies of selecting options to buy or sell as a function of (1) whether the option is in-or out-of-the money and (2) time to maturity. The first part of the paper reviews theoretical implications of option selling and buying on portfolio risk and return, and surveys recent empirical evidence. This is followed by a description of the data used in this analysis and the methodology followed to select option contracts and measure performance of the various strategies. Strategy risk and return comparisons are presented in the section headed Strategy Performance and Analysis, and the implications of this analysis to both individual and institutional investors are given in the final section. Call Options in Perspective Buying call option contracts is viewed generally as a speculative investment strategy. Most studies (Roenfeldt et al., 1979 and Trennepohl and Dukes, 1979) show that buying options rewards investors infrequently with very large positive returns, but more often results in complete loss of the investment at risk. Mean

This research describes the proper specification and measurement of portfolio skewness and presen... more This research describes the proper specification and measurement of portfolio skewness and presents empirical results abcut the behavior of skewness parameters as portfolio size is altered. Since the analysis is mathematical in nature, the concepts developed in the paper can be applied to any security population.

Journal of Financial Research, Mar 1, 1979

Journal of Financial Research, Sep 1, 1983

Skewness in returns is relevant to option investors. Because options possess positively skewed di... more Skewness in returns is relevant to option investors. Because options possess positively skewed distributions, the traditional maxim of diversification, which can destroy positive skewness, is not necessarily consistent with investment objectives. The results indicate that the majority of skewness in option portfolios is diversified with a relatively small portfolio size, suggesting a strategy of antidiversification for option investors. Even though the investment performance of options is inferior to stocks on a risk‐return basis, the data indicate the suitability of option portfolios in an environment where an investor's utility is measured by the return, risk, and skewness of the return distribution.

Journal of Economics and Business, Feb 1, 1985

Abstract This article shows that serious analytical errors may occur in expected utility theory w... more Abstract This article shows that serious analytical errors may occur in expected utility theory when Taylor series approximation methods are used without careful attention to underlying mathematical assumptions. Recent studies have developed theory incorporating skewness of return into expected utility calculations based on a Taylor series approximation. It is apparent that this theory is invalid if assumptions for application of a Taylor series cannot be met. Errors may occur if returns fall outside the region of convergence of the utility function ot if the partial sums of the Taylor series provide poor approximations to the utility function. Stylized examples are presented to illustrate miscalculation of utility when the various assumptions are violated. These examples are motivated by the use of Taylor series approximations in current literature which deal with the new spectrum of financial securities.

Journal of Financial Research, Mar 1, 1981

Recent studies examining the relationship between Black and Scholes option model prices and obser... more Recent studies examining the relationship between Black and Scholes option model prices and observed Chicago Board Options Exchange market values [4, 5, 6, 10] are based upon short time periods (1 year or less [5, 6, 10]) or are constrained by data availability (6 stocks or less [4, 10). The purpose of this paper is to examine the relationship between actual option premiums and Black and Scholes (B-S) model prices

The Journal of Financial and Quantitative Analysis, 1985

Page 1. JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS VOL. 20, NO. 4, DECEMBER 1985 Efficiency A... more Page 1. JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS VOL. 20, NO. 4, DECEMBER 1985 Efficiency Analysis and Option Portfolio Selection James R. Booth, Hassan Tehranian, and Gary L. Trennepohl* Abstract ...

Title page includes summary.Includes bibliographical references (p. 40)

Journal of Financial Research, 1979

This paper shows that serious analytical errors may occur in expected utility theory when Taylor ... more This paper shows that serious analytical errors may occur in expected utility theory when Taylor series approximation methods are used without careful attention to underlying mathematical assumptions. Recent studies have developed theory incorporating skewness of return into expected utility calculations based on a Taylor series approximation. It is apparent that 'this theory is invalid if assumptions for application of a Taylor series cannot be met. Errors may occur if returns fall outside the region of convergence of the utility function or if the partial sums of the Taylor series provide poor approximations to the utility function. Stylized examples are presented to illustrate miscalculation of utility when the various assumptions are violated. These examples are motivated by the new spectrum of financial securities which allow investors to create almost any desired expected return distribution. Asset Preference and the Measurement of Expected Utility: Some Problems Under ce...