Option Trading and Individual Investor Performance
Erasmus University - Rotterdam School of Management
Piet M. A. Eichholtz
University of Maastricht - Limburg Institute of Financial Economics (LIFE)
October 24, 2008
EFA 2007 Ljubljana Meetings Paper
Journal of Banking and Finance, Forthcoming
This paper examines the impact of option trading on individual investor performance. The results show that most investors incur substantial losses on their option investments, which are much larger than the losses from equity trading. We attribute the detrimental impact of option trading on investor performance to poor market timing that results from overreaction to past stock market returns. High trading costs further contribute to the poor returns on option investments. Gambling and entertainment appear to be the most important motivations for trading options while hedging motives only play a minor role. We also provide strong evidence of performance persistence among option traders.
Number of Pages in PDF File: 42
Keywords: option trading, individual investor performance, investor sentiment, performance persistence, Internet brokerage
JEL Classification: G11, G12, G14, G24
Date posted: March 1, 2007 ; Last revised: December 20, 2008
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