Losers and prospectors in the short-term options market |
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| Authors: | Arjun Chatrath Rohan A Christie-David Hong Miao Sanjay Ramchander |
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| Institution: | 1. Pamlplin School of Business, University of Portland, Portland, Oregon;2. Finance Discipline, School of Business, University of Colorado 3. Denver, Denver, Colorado;4. Finance and Real Estate Department, College of Business, Colorado State University, Fort Collins, Colorado |
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| Abstract: | Intraday data for weekly options are investigated for behavioral biases implied in prospect theory (PT) and cumulative prospect theory (CPT). The results generally support both theories, with losers (winners) observed to be relatively risk-seeking (averse). On aggregate, losers (winners) overprice (underprice) their contracts and overweight (underweight) the probability of winning. Additionally, the volatility smirk observed in equity options is dampened by PT/CPT biases. The price distortions are time sensitive, especially for losing traders. Losers hold out by transacting later in the day and closer to expiration than their baseline counterparts. This betting-time effect is absent among winners. |
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| Keywords: | losers and prospectors prospect theory STOs |
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