A Comparison of the Performance of Rainbow Options and Stocks under COVID-19 and Ukraine Conflict

Abstract

This paper hopes to explore which is the better choice for investors under the different environments of the US stock market, rainbow option or buying a single stock. Due to the improvement of the COVID-19 situation in the United States in 2021 and the introduction of government policies to stimulate the economy, the US stock market showed an upward trend throughout 2021. In 2022, due to the conflict between Russia and Ukraine, the global economy will be impacted, and the US stock market is no exception. In these two long-term bear markets and bull markets, it hopes to find a mutation option to control risks and improve returns. In this case, it focuses on rainbow options, which are options that help investors screen out the better-performing stocks or futures included in them. First, this paper paired 14 stocks in five fields, calculated the option’s payoff according to the rainbow option's rules, and then compared it with the return of the stock alone to explore the superiority of the rainbow option. The return on the rainbow option is higher than the return on any single stock. Then the option is simulated and priced for 1000 future trading days so as to obtain the return of the rainbow option under the assumption of stable fluctuation in the US stock market environment, which is used as the reference for pricing. Finally, the sensitivity analysis of options is conducted to study the main factors affecting the volatility of option premiums. The result is that the moves in rainbow options are always correlated with the stock that is more active.