Investor Behavior in the Option Market

54 Pages Posted: 31 Jan 2004 Last revised: 20 Jul 2022

See all articles by Josef Lakonishok

Josef Lakonishok

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Inmoo Lee

KAIST College of Business

Allen M. Poteshman

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: February 2004

Abstract

This paper investigates the behavior of investors in the equity option market using a unique and detailed dataset of open interest and volume for all contracts listed on the Chicago Board Options Exchange over the 1990 through 2001 period. We document major stylized facts about the option market activity of three types of non-market maker investors over this time period and also investigate how their trading changed during the stock market bubble of the late 1990s and early 2000. Our key findings are: (1) non-market maker investors have about four times more long call than long put open interest, (2) these investors have more short than long open interest in both calls and puts, (3) each type of investor purchases more calls to open brand new positions when the return on underlying stocks are higher over horizons ranging from one week to two years into the past, (4) the least sophisticated group of investors substantially increased their purchases of calls on growth but not value stocks during the stock market bubble of the late 1990s and early 2000, and (5) none of the investor groups significantly increased their purchases of puts during the bubble period in order to overcome short sales constraints in the stock market.

Suggested Citation

Lakonishok, Josef and Lee, Inmoo and Poteshman, Allen M., Investor Behavior in the Option Market (February 2004). NBER Working Paper No. w10264, Available at SSRN: https://ssrn.com/abstract=495769

Josef Lakonishok (Contact Author)

University of Illinois at Urbana-Champaign ( email )

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National Bureau of Economic Research (NBER)

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Inmoo Lee

KAIST College of Business ( email )

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Seoul 02455
Korea, Republic of (South Korea)

Allen M. Poteshman

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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Champaign, IL 61820
United States
217-265-0565 (Phone)
217-244-3102 (Fax)

HOME PAGE: http://www.business.uiuc.edu/poteshma

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