Test on the Profit of Pairs Trading Strategy Using KOSPI200 Regular and Mini Options

The KOSPI200 mini option introduced in July 2015 is the derivative of which trading multiplier is reduced to one-fifth of the regular options. This study explored the pairs trading opportunities arising from the price spread between the KOSPI200 regular options and the mini options during the sample period from August 2015 to March 2016 and measured the profits of pairs trading. The main results are summarized as follows. First, the most frequency of pairs trading with high profit was observed for in-the-money options. On the other hands, the frequency of pairs trading opportunities is low and the profit is relatively small for out-of (at)-the money options. Second, for in-the-money options, arbitrage opportunities were captured every three minutes on an average, but the elapsed time between arbitrage opportunity opportunities on out-of-the money options exceeded 10 minutes on average. Third, pairs trading opportunities occur uniformly throughout the day, but profit tends to increase in the afternoon than in the morning. This indicates that price efficiency in options market deteriorates and profit of arbitrage trading with price disparity is higher in the afternoon than that of the morning trading. In addition, the profitability of pairs trading with low liquidity was cross-sectionally higher than those with high liquidity.