Abstract
The purpose of this paper is to tight the connection between the option pricing theory and practical trading strategies. The gain-loss ratio method of Bernardo and Ledoit (2000) is employed instead of Black-Sholes pricing method to investigate a reasonable price bounds. By imposing the gain-loss ratio, the option price fall out of the boundary is regarded as an irrational or a semi-arbitrage price. The trading strategies are based on the gain-loss bounds, and various bounds can be obtained by adjusting the gain-loss ratio. The empirical result shows that the greater the gain-loss ratio of trading strategies, the wider the gain-loss bound. The probability that the price fall out the boundary is lower but the return of the strategies is approximately higher. The frequency of facing extremely losses is lower. Moreover, the performance of selling put is better than short strangle when taking the tradeoff between return and risk into consideration. Under our specification, holding the position to maturity seems to have the best performance. Changing the volatility every ten minutes doesn’t have big contribution of reducing the risk and extending the sample period of estimating volatility can lower the risk.