Diversification and skewness in option portfolios

Skewness in returns is relevant to option investors. Because options possess positively skewed distributions, the traditional maxim of diversification, which can destroy positive skewness, is not necessarily consistent with investment objectives. The results indicate that the majority of skewness in option portfolios is diversified with a relatively small portfolio size, suggesting a strategy of antidiversification for option investors. Even though the investment performance of options is inferior to stocks on a risk‐return basis, the data indicate the suitability of option portfolios in an environment where an investor's utility is measured by the return, risk, and skewness of the return distribution.