Abstract
A moneyness-based propensity to sell (MPS) measure, at the aggregate level, determines the propensity of option holders to exercise their winning relative to losing positions. Using data on individual stock and S&P 500 Index options, we find that the MPS measure has significant predictive power over the cross section of delta-hedged option returns. We test the disposition effect in the options market based on a long–short strategy that exploits price distortions induced by the disposition bias. More pronounced evidence of the disposition bias is found for individual at-the-money call options than put options where the significance of abnormal returns remains robust across different subsamples even after we control for the portfolio option greeks and market-based risk factors. The profitability of the long–short strategy is related to limit-to-arbitrage proxies suggesting that behavioral explanations help explain the positive relation between the MPS measure and delta-hedged option returns.
Original language | English |
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Pages (from-to) | 75-106 |
Number of pages | 32 |
Journal | Financial Management |
Volume | 50 |
Issue number | 1 |
DOIs | |
State | Published - 1 Mar 2021 |
Keywords
- capital gains overhang
- disposition effect
- option markets