Individual Investors and Option Trading: Attention Grabbing Versus Long-Term Strategies

57 Pages Posted: 23 Jan 2011 Last revised: 9 Feb 2011

See all articles by Christof Beuselinck

Christof Beuselinck

Catholic University of Lille - IESEG School of Management

Dries Heyman

Ghent University - Department of Financial Economics

Maarten Pronk

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: December 21, 2010

Abstract

This paper analyzes trading records of online retail bank investors to examine whether attention-type events dominate return feedback strategies in explaining individual investors’ stock option trading decisions. We show that although individual investors are net buyers of common stock on abnormally high volume days, they follow contrarian investment strategies after extreme prior day stock price performance. Moreover, we find that individual investors especially exploit stock options to follow contrarian investment strategies in that they initiate over twice as many bullish-type (nearly half as many bearish-type) option contracts after extremely poor (good) prior-day returns. Further, we observe variance in contrarian behavior across investor types: extremely optimistic investors pursue contrarian investment strategies more (less) pronounced around highly negative (positive) prior day returns. Finally, we show that the same extreme optimists especially overweigh short-term compared to long-term return feedback information in making individual stock option trading decisions. Combined, this study provides novel insights in the dynamics of individual investors’ option trading decisions and in the distinctive roles of cognitive biases underlying this process.

Suggested Citation

Beuselinck, Christof and Heyman, Dries and Pronk, Maarten, Individual Investors and Option Trading: Attention Grabbing Versus Long-Term Strategies (December 21, 2010). Available at SSRN: https://ssrn.com/abstract=1745728 or http://dx.doi.org/10.2139/ssrn.1745728

Christof Beuselinck

Catholic University of Lille - IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Puteaux, 92800
France
+33320545892 (Phone)

Dries Heyman (Contact Author)

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium
0032 (0)9 2645307 (Phone)
(0)9 2643577 (Fax)

Maarten Pronk

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

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3000 DR Rotterdam, NL 3062 PA
Netherlands

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