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Option trading and returns versus the 52‐week high and low

Siu Kai Choy and Jason Wei

The Financial Review, 2022, vol. 57, issue 3, 691-726

Abstract: We show that option traders suffer from the anchoring effect induced by the stock price's 52‐week high or low. Specifically, (1) trading of all options decreases as the stock price approaches its 52‐week high or low, (2) the buy–sell imbalance for calls decreases and that for puts increases as the stock price approaches its 52‐week high, and the opposite occurs as the stock price approaches its 52‐week low, and (3) the subsequent delta‐hedged option returns for both calls and puts are higher as the stock price approaches its 52‐week extreme.

Date: 2022
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Handle: RePEc:bla:finrev:v:57:y:2022:i:3:p:691-726