Gambling preference and individual equity option returns

Suk-Joon Byun and Da-Hea Kim

Journal of Financial Economics, 2016, vol. 122, issue 1, 155-174

Abstract: We investigate the relation between the option returns and the underlying stock's lottery-like characteristics. Call options written on the most lottery-like stocks underperform otherwise similar call options written on the least lottery-like stocks by 10–20% per month. Moreover, the more lottery-like the underlying stocks, the further and more frequently the options deviate from the put–call parity in the direction induced by overvalued calls. Furthermore, the lottery-like characteristic effect is stronger during periods of high investor sentiment. The results suggest that optimism-induced gambling preference causes lottery-like options to be overvalued.

Keywords: Stock options; Lottery; Skewness preference; Put–call parity; Investor sentiment (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:122:y:2016:i:1:p:155-174

DOI: 10.1016/j.jfineco.2016.06.004

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