A bull spread strategy consists of purchasing a near- or at-the-money option, followed by selling a higher strike price out-of-the money option in order to reduce the overall cost of the spreading strategy. The strategy is highly profitable when the price of the underlying primitive reaches the second out-of-the-money strike price before the expiration date of the options, but no further. The challenge is in choosing the optimal out-of-the-money option strike price. A neural network based algorithm in which next day' forecasted information is used to forecast the following day's stock price is used to determine the strike price of the option to be sold. Results from this neural network based bull option spreading strategy will be compared against those obtained using GARCH and ARIMA based methodologies. This study will use historical data of the 3Com Corporation (symbol: COMS), along with the associated stock options.
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