Back-testing the performance of an actively managed option portfolio at the Swedish Stock Market, 1990-1999

We build an investment model based on Stochastic Programming. In the model we buy at the ask price and sell at the, bid price. We apply the model to a case where we can invest in a Swedish stock index, call options on the index and the risk-free asset. By reoptimizing the portfolio on a daily basis over a ten-year period, it is shown that options can be used to create a portfolio that outperforms the index. With ex post analysis, it is furthermore shown that we can create a portfolio that dominates the index in terms of mean and variance, i.e. at given level of risk we could have achieved a higher return using options. (C) 2002 Elsevier Science B.V. All rights reserved.