Investor Attention and Option Returns

Siu Kai Choy () and Jason Wei ()
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Siu Kai Choy: King’s Business School, King’s College London, London WC2B 4BG, United Kingdom
Jason Wei: Department of Management, University of Toronto Scarborough, Toronto, Ontario M1C 1A4, Canada; Joseph L. Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada

Management Science, 2023, vol. 69, issue 8, 4845-4863

Abstract: This paper examines the attention effect in the options market. We show that option investors (especially retail investors) buy more calls and puts on both daily winner and loser stocks, and this buying pressure leads to an overvaluation, as shown in subsequent lower hedged returns. The overvaluation is due to a combination of differences of opinion, risk aversion, and margin requirements. The economic magnitude is large. For instance, a zero-financing portfolio involving options on loser stocks renders an alpha of 2.90% per month. Aside from contributing to the broad literature of investor attention versus asset returns, our study also sheds light on an important yet largely neglected topic: the impact of margins on option trading and pricing.

Keywords: investor attention; daily winners and losers; option returns; margins; limits to arbitrage (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:8:p:4845-4863

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