Let's say you want to have a equally-weighted (in terms of the option price) portfolio of short put options on various stocks with the same maturity.

Running Monte-Carlo simulations, it seems that choosing options with a highly correlated stock as an underlying results into a higher value of my portfolio.

Intuitively, I would have guessed that correlations close to zero would be preferable, because then we would have more independent bets which are more likely to be not executed at maturity.

Any ideas what correlation structure should be preferred?

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  • $\begingroup$ You mean with no correlation you would expect to be executed in more cases, right? $\endgroup$ – SRKX Dec 8 '16 at 5:19
  • $\begingroup$ I would expect that they would be executed in less cases. $\endgroup$ – PureVega Dec 8 '16 at 7:32
  • $\begingroup$ As I see it, correlation of the stocks does not affect the expected return of the portfolio, as the expected returns are additive (independent of the correlations). However, the correlation does affect the variance of possible outcomes. I wonder, if you ran enough simulations to be able to claim the portfolio of options to really have a higher value. Especially, if you were using deep OTM options, quite a large sample size would be required to draw definite conclusions. $\endgroup$ – MGL Dec 8 '16 at 9:30

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