Early Unwinding Strategy in Index Options-Futures Arbitrage

We first re-examine buy-and-hold arbitrage strategies using both ex-post and ex-ante index options and futures data in Hong Kong. The results show that the arbitrage profit is not large enough to cover the transaction costs for both individual and institutional investors. Second, we find that, when an early unwinding strategy is employed, the arbitrage profit improves significantly under an ex-post analysis but only improves slightly under an ex-ante analysis. In addition, opportunities for same-day unwinding are very limited. Finally, our regression results indicate that the magnitude of the arbitrage profit is positively related to the volatility of the stock market