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Option trading and individual investor performance

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  • Bauer, Rob
  • Cosemans, Mathijs
  • Eichholtz, Piet
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    Abstract

    This paper examines the impact of option trading on individual investor performance. The results show that most investors incur substantial losses on their option investments, which are much larger than the losses from equity trading. We attribute the detrimental impact of option trading on investor performance to poor market timing that results from overreaction to past stock market returns. High trading costs further contribute to the poor returns on option investments. Gambling and entertainment appear to be the most important motivations for trading options while hedging motives only play a minor role. We also provide strong evidence of performance persistence among option traders.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 33 (2009)
    Issue (Month): 4 (April)
    Pages: 731-746

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    Handle: RePEc:eee:jbfina:v:33:y:2009:i:4:p:731-746

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Option trading Individual investor performance Investor sentiment Performance persistence Internet brokerage;

    References

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Investidor Pessoa Física
      by Roberto Ushisima in Empresas e Mercados on 2009-09-22 15:34:00
    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:
    1. Albert Wang, F., 2010. "Informed arbitrage with speculative noise trading," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 304-313, February.
    2. Choy, Siu Kai & Wei, Jason, 2012. "Option trading: Information or differences of opinion?," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2299-2322.
    3. Fahlenbrach, Rüdiger & Sandås, Patrik, 2010. "Does information drive trading in option strategies?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2370-2385, October.
    4. Bohl, Martin T. & Kaufmann, Philipp & Stephan, Patrick M., 2013. "From hero to zero: Evidence of performance reversal and speculative bubbles in German renewable energy stocks," Energy Economics, Elsevier, vol. 37(C), pages 40-51.
    5. Takahashi, Hidetomo, 2010. "Short-sale inflow and stock returns: Evidence from Japan," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2403-2412, October.
    6. Hoffmann, Arvid O.I. & Post, Thomas & Pennings, Joost M.E., 2013. "Individual investor perceptions and behavior during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 60-74.
    7. Humphery-Jenner, Mark L., 2011. "Optimal VWAP trading under noisy conditions," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2319-2329, September.
    8. Martin Bohl & Philipp Kaufmann & Patrick Stephan, 2012. "From Hero to Zero: Evidence of Performance Reversal and Speculative Bubbles in German Renewable Energy Stocks," CQE Working Papers 2412, Center for Quantitative Economics (CQE), University of Muenster.
    9. Chuang, Wen-I & Susmel, Rauli, 2011. "Who is the more overconfident trader? Individual vs. institutional investors," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1626-1644, July.
    10. Döbeli, Barbara & Vanini, Paolo, 2010. "Stated and revealed investment decisions concerning retail structured products," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1400-1411, June.
    11. Stephan Meyer & Sebastian Schroff & Christof Weinhardt, 2014. "(Un)skilled leveraged trading of retail investors," Financial Markets and Portfolio Management, Springer, vol. 28(2), pages 111-138, May.

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