Cheap Options Are Expensive

Assaf Eisdorfer, Amit Goyal and Alexei Zhdanov
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Assaf Eisdorfer: University of Connecticut - Department of Finance
Alexei Zhdanov: Pennsylvania State University

No 20-64, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We show that options written on stocks with low prices are over-priced. This effect is robust to a variety of tests, controlling for common stock- and option- risk characteristics, and to reasonable transaction costs. Natural experiments corroborate this finding; options tend to become relatively more expensive following stock splits; and options on mini-indices are overpriced relative to options written on otherwise identical regular-priced indices. Our evidence suggests that (less sophisticated) retail investors consider options with low underlying prices as good deals due to low prices of such options. Demand pressure from these investors leads to option overpricing.

Keywords: Option Returns; Investor Inattention (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2020-08
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2064

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