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Gambling preference and individual equity option returns

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  • Byun, Suk-Joon
  • Kim, Da-Hea

Abstract

We investigate the relation between the option returns and the underlying stock's lottery-like characteristics. Call options written on the most lottery-like stocks underperform otherwise similar call options written on the least lottery-like stocks by 10–20% per month. Moreover, the more lottery-like the underlying stocks, the further and more frequently the options deviate from the put–call parity in the direction induced by overvalued calls. Furthermore, the lottery-like characteristic effect is stronger during periods of high investor sentiment. The results suggest that optimism-induced gambling preference causes lottery-like options to be overvalued.

Suggested Citation

  • Byun, Suk-Joon & Kim, Da-Hea, 2016. "Gambling preference and individual equity option returns," Journal of Financial Economics, Elsevier, vol. 122(1), pages 155-174.
    • Handle: RePEc:eee:jfinec:v:122:y:2016:i:1:p:155-174
    DOI: 10.1016/j.jfineco.2016.06.004
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    More about this item

    Keywords

    Stock options; Lottery; Skewness preference; Put–call parity; Investor sentiment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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