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Investor Behavior in the Option Market
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Investor Behavior in the Option Market

Author

Listed:
  • Josef Lakonishok
  • Inmoo Lee
  • Allen M. Poteshman

Abstract

This paper investigates the behavior of investors in the equity option market using a unique and detailed dataset of open interest and volume for all contracts listed on the Chicago Board Options Exchange over the 1990 through 2001 period. We document major stylized facts about the option market activity of three types of non-market maker investors over this time period and also investigate how their trading changed during the stock market bubble of the late 1990s and early 2000. Our key findings are: (1) non-market maker investors have about four times more long call than long put open interest, (2) these investors have more short than long open interest in both calls and puts, (3) each type of investor purchases more calls to open brand new positions when the return on underlying stocks are higher over horizons ranging from one week to two years into the past, (4) the least sophisticated group of investors substantially increased their purchases of calls on growth but not value stocks during the stock market bubble of the late 1990s and early 2000, and (5) none of the investor groups significantly increased their purchases of puts during the bubble period in order to overcome short sales constraints in the stock market.

Suggested Citation

  • Josef Lakonishok & Inmoo Lee & Allen M. Poteshman, 2004. "Investor Behavior in the Option Market," NBER Working Papers 10264, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:10264
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    References listed on IDEAS

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    Cited by:

    1. Han, Bin, 2004. "Limits of Arbitrage, Sentiment and Pricing Kernal: Evidences from Index Options," Working Paper Series 2004-2, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    2. Jun Pan & Allen M. Poteshman, 2006. "The Information in Option Volume for Future Stock Prices," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 871-908.
    3. Haim Kedar-Levy, 2013. "A Rational Foundation for Trend-Chasing and Contrarian Trades with Implications for Momentum Anomalies," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-21.
    4. Lecce, Steven & Lepone, Andrew & McKenzie, Michael D. & Segara, Reuben, 2012. "The impact of naked short selling on the securities lending and equity market," Journal of Financial Markets, Elsevier, vol. 15(1), pages 81-107.
    5. Chiang, Chin-Han, 2014. "Stock returns on option expiration dates: Price impact of liquidity trading," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 273-290.

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