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Striking Out: Biases and Losses of Retail Option Traders

Author

Listed:
  • Aleksi Pitkäjärvi

    (Vrije Universiteit Amsterdam)

  • Matteo Vacca

    (Aalto University School of Business and Hanken School of Economics)

Abstract

Analyzing over 15 years of account-level trading records from Finland, we show that option features—expiration, moneyness, and the strike price—influence the behavior of retail investors and exacerbate their behavioral biases. Retail investors selectively exploit the expiration feature of options to mitigate the psychological costs associated with selling losing positions, generating a strong disposition effect especially for out-of-the-money options. They also use the strike price of an option as an objective, instrument-specific reference point when making their selling decisions. Behavioral biases contribute to heterogeneity in option trading performance, with the worst performance concentrated among investors with the strongest biases.

Suggested Citation

  • Aleksi Pitkäjärvi & Matteo Vacca, 2024. "Striking Out: Biases and Losses of Retail Option Traders," Tinbergen Institute Discussion Papers 24-039/IV, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20240039
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    References listed on IDEAS

    as
    1. Luigi Zingales, 2015. "Does Finance Benefit Society?," NBER Working Papers 20894, National Bureau of Economic Research, Inc.
    2. Vasudevan, Ellapulli V., 2023. "Some gains are riskier than others: Volatility changes and the disposition effect," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 68-81.
    3. Vokata, Petra, 2023. "Salient Attributes and Household Demand for Security Designs," Working Paper Series 2023-07, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    4. Luigi Zingales, 2015. "Presidential Address: Does Finance Benefit Society?," Journal of Finance, American Finance Association, vol. 70(4), pages 1327-1363, August.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G50 - Financial Economics - - Household Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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